Standing Committee A

[Mr. Edward O'Hara in the Chair]
(Except clauses 13 to 15, 26, 61, 91 and 106, schedule 14, and new clauses relating to the effect of provisions of the Bill on section 18 of the Inheritance Tax Act 1984)

Schedule 20

Inheritance tax: rules for trusts etc

Amendment moved [this day]: No. 226, in page 115, line 12 [Vol II], leave out from beginning to end of line 25.—[Mrs. Villiers.]

Edward O'Hara: I remind the Committee that with this we are discussing the following: Government amendment No. 359.
Amendment No. 227, in page 115, line 26 [Vol II], leave out ‘5' and insert ‘3'.
Amendment No. 228, in page 115, line 30 [Vol II], leave out from beginning to end of line 18 on page 116.
Government amendments Nos. 360, 36, 368 and 370.

Theresa Villiers: With your indulgence, Mr. O’Hara, I shall spend a couple of minutes responding to a question that I was asked this morning by the hon. Member for Wolverhampton, South-West (Rob Marris), but which unfortunately I was unable to answer. It relates to the tax consequences of removing the use of trusts in divorce cases and shifting to other mechanisms, such as a charge or alternatives.

Iain Wright: On a point of order, Mr. O’Hara. I raised a point of order during the morning sitting, when Sir John was chairing the Committee, about the exchange of information between Opposition Members and people in the Public Gallery. Between the sittings, I did some research and I have realised that the individual in the Public Gallery who was passing information to the hon. Member for South-West Hertfordshire (Mr. Gauke) was a Mr. Tim Galloway. Mr. Galloway is a partner in Charles Russell, a City of London legal firm. The firm’s website says:
“Tim specialises in all aspects of succession and capital tax planning for UK and foreign domiciled individuals, their trusts and companies in relation to assets both within the UK and offshore.”
Given the direct exchange of information between that member of the public and the hon. Gentleman, and the fact that that person and his firm would have a direct commercial interest, should that not have been raised in the interests of transparency and accountability both to you and to the Committee?

Edward O'Hara: As I understand it, it has been openly acknowledged on numerous occasions in the Committee that members of the Committee are speaking to briefs that they have been given by stated advisers and stated lobbyists. As long as that does not happen within the Committee, if a member of the Committee goes outside the Committee, which is beyond the Bar, to receive information—I would rather that it was outside of the Room—I do not see what difference there is in principle between receiving information in the post and receiving information outside the Committee by hand.

John Heppell: Further to that point of order, Mr. O’Hara. Is not the usual practice, though, for the member of the Committee to acknowledge when raising a point which organisation it has come from? That is what we were missing in this instance.

Edward O'Hara: I would accept that, because I was not here when the incident happened. I said in my previous remarks that hon. Members have acknowledged numerous times in my presence which advice from which lobbyists and advisers they are speaking to, and that is good practice.

Andrew Selous: Further to that point of order, Mr. O’Hara. It is up to any member of the Committee to seek any advice that they want from any party whatever. Provided that they have no registrable interest with the organisation involved, presumably it is up to the member whether they choose to reveal the source of their advice before speaking.

Edward O'Hara: Yes, I cannot take responsibility for that; members of the Committee must take responsibility for their own practice. It would be good practice to make an acknowledgement, but I have to accept that if the member speaking to advice has no registrable interest, he does not have to make such an announcement. There is a difference between good practice and legal responsibility.

Theresa Villiers: I appreciate that clarification, Mr. O’Hara. Throughout our proceedings, I have referred to numerous points made by the professional organisations. They are experts in this area and have every right to have their point of view heard. I am happy to own up to the Committee that I have talked at length to many of those organisations about how schedule 20 works. Perhaps it would have been a positive move had some Ministers listened to them as well. I am delighted that in a number of cases the Paymaster General has indeed listened to those representations. I believe that the influence of the people to whom the hon. Gentleman refers can also be seen in some of the Government amendments that have made a positive contribution to the debate.

Dawn Primarolo: I am sure that the hon. Lady would acknowledge that it is not always possible for a Minister to say exactly what has been said in private on anything, as it is a matter of confidentiality. The only point is that if one receives advice, it is declarable. We received advice in opposition from PricewaterhouseCoopers and it was declared in the register of interests. As I understand it, the hon. Lady is following the same practice. As long as it is all transparent, there is not an issue.

Theresa Villiers: Thank you.
Returning to the point that I was discussing before the point of order was made, the better way to consider the tax consequences of relationship breakdown in this context is to consider an example: H and W, a couple who have split up. Their home is valued when the split takes place, the house is worth £400,000 and the court decides that H and W should be entitled to equal shares, but the valuation is followed by a period of occupation by one spouse and not the other. At that point the property is sold and the proceeds distributed between the ex-spouses. The property is now worth £440,000.
There are two options outside the standard trust set up that we discussed earlier. In the first, the husband retains part-ownership of the property. When it is sold he gets back not the £200,000 that his share was originally worth but the £220,000 that reflects the increase in value when the house was sold. He has to pay capital gains tax on the increase at that point because it is no longer his principal private residence and he will no longer receive CGT relief. In the second the property is placed solely in the legal ownership of the wife. She agrees to pay the husband the value of his original half share when the house is sold. That is treated for tax purposes as a loan from the husband to the wife. When the house is sold she pays him back the £220,000 that his share is now worth and in that case the uplift from the original £200,000 is treated as interest on a loan and, I understand, is subject to income tax. Further guidance can be found in the “Capital Gains Manual”.

Rob Marris: I am grateful to the hon. Lady for that example. Will the tax paid not be the same or less if it is capital gains rather than income tax, depending on the rate at which the husband in the second example who receives the repayment of the loan, pays income tax? In fact, he might be better off paying the capital gains tax.

Theresa Villiers: I am not sure exactly how the level of the tax will vary between the income tax and the capital gains tax choice. That will, I think, depend on the individual concerned and their personal allowances. I do not want to delay the Committee on this point, because we have moved on, but in essence the ruling out of the trust option in divorce cases means that an extra tax charge will be payable. In this case, either they have a trust and pay the new charges for that trust, which are 6 per cent. on capital, or they take the ownership route and pay capital gains tax, or they take the income tax route with a charge and the husband ends up paying income tax. Either way, where there was no tax on the arrangements there will now be tax.
To return to the point at which I left off shortly before the break in our proceedings, I was referring to the problems caused by section 32 of the Trustee Act, which introduces flexibility into trusts sufficient to take them outside the limitations placed by condition 4. Of course, the deletion of condition 4 will remove the risk of problems caused by section 32 and it is another reason that I hope that the Committee will support my amendment or that tabled by the Paymaster General.
When I initially raised my concerns about those issues and about condition 4 in particular, the Paymaster General dismissed them on the grounds that people could change their wills to comply with the requirements set out so that they could comply with an immediate post-death interest, presumably by deleting the flexibility that was deemed offensive under conditions 3 and 4. Given her amendment, I understand that she no longer believes that that is the right response.
For various reasons, I do not believe that variation was going to be the answer to the problems. First, flexibility is built into trusts for good reasons—to allow the trust to adapt to unforeseen circumstances and help people deal with the complexity of family life and an uncertain and often unpredictable future. A rule that required people to vary their wills to remove all such flexibility would not be good from a public policy perspective.
Secondly, the cost of reviewing the millions of wills affected would far outweigh the £15 million that the Red Book tells us schedule 20 would raise in extra revenue. I do not think that the Government ever engaged sufficiently with the figures produced by the Society of Trust and Estate Practitioners on the number of people affected. In a survey, STEP found that at least 1 million wills would have to be reviewed or rewritten; in fact, that much quoted figure is probably an underestimate of the numbers affected. It is based on the response to a survey by their members, but that figure represents only the wills affected that were held by the 11 per cent. of STEP members who responded to the survey. Taking into account the thousands of wills held by other firms that did not respond, the actual figure may well have been much higher.
Edward Nugee QC wrote to a national newspaper saying:
“The effect of the new measure is that virtually every will in the country that has been prepared on legal advice will need to be rewritten, and trusts of virtually every settlement for the benefit of children and grandchildren which has been drafted to comply with fiscal statutes which have been in existence for the past 30 years or more will need to be altered, if its terms allow such alteration.”
Remember that with the best will in the world, very few people review their wills regularly. Wills are therefore drafted so that they can provide for changing circumstances over a long period. A point well made by the Institute of Chartered Accountants is that even if an estate is under the IHT threshold, even if the property it comprises is fairly modest, it would be a high-risk strategy for the majority of middle-income families to assume that it would never exceed the IHT nil rate band. They would therefore have to write a will that took into account the IHT consequences should their property exceed that nil rate band at any point.
When they drafted schedule 20, the Government did not seem to grasp that the number of wills using trusts will far outstrip the number of trusts that ultimately come into being. That is because wills frequently deploy the trust concept to provide for events that may never occur—for example, a parent dying before her children have grown up. Trusts are included in virtually every will drafted, with professional advice, by people who have children. In many cases, the testator may not even realise that she is setting up a trust; the will may simply say, “I wish my husband to be able to live in the house until his death, and then it goes to our children.”
A further STEP survey finding concluded that the estimated average cost of reviewing each will would be about £341. Compliance costs of £341 million make no sense for a tax measure predicted to raise only £15 million.
The third reason why variation of wills is not a sufficient answer is that for many it will be too late to do it. Many people may be so old as to have lost capacity, leaving the grim and very expensive prospect of a visit to the Court of Protection to make any necessary changes. If the testator has died since Budget day, the only way to amend the will is via a deed of variation, but that can be executed only if all those who stand to benefit under the will consent to it. If there are any children, a court hearing will be required and permission for the variation may not be granted. Even if all the beneficiaries are adult, it may not be possible to secure an agreement, particularly in the typical case, to which I have adverted, in which trusts balance the interests of step-parents and step-children.
Similar problems apply in respect of existing trusts that would be hit by the harshness of schedule 20 as originally drafted. Again, in many cases, court hearings will be needed to vary a trust. Let me make it clear that a hearing in the chancery division of the High Court does not come cheap. Questions would also arise about how well equipped the courts would be to hear a significant number of cases under schedule 20.
To conclude on the spouse exemption, I refer to a Southampton solicitor, who dealt with wills regularly over a protracted period. He wrote to his local Member of Parliament, the hon. Member for New Forest, West (Mr. Swayne), saying:
“It is almost impossible to create an immediate post death interest.
However who drafted the provisions about it in the Finance Bill did not know enough about trust law or about provisions that individuals want to put in their wills when they create trusts of this kind...If the immediate post-death interest conditions as they appear under the Finance Bill are not amended, they will be unusable.
Trying to create trusts which are within restrictive conditions will create problems for those who are beneficiaries of such inflexible trusts...If there is one thing I have learnt in 25 years working with trusts it is that inflexibility in the documents creates family problems, financial problems and fiscal problems”.
I warmly welcome the shift by the Government and the Paymaster General. They have listened to the concerns that have been expressed on this matter, both by the Opposition and the professional groupings that have caused some controversy this afternoon. I do not propose to press amendment No. 226 to a Division. I should be delighted to support the amendments tabled by the Paymaster General to delete conditions 3 and 4 and the consequential provisions.

David Gauke: It is a great pleasure to return to draft section 49A of the Inheritance Tax Act 1984 to which I referred when we discussed matters in Committee of the whole House, and to deal with amendment No. 226 and Government amendment No. 359. Widespread anxiety has been expressed that the amendments in respect of trust law under the original Finance Bill would cause problems in those areas when trusts are used not for taxation purposes, but non-taxation purposes. The classic case is that of someone who is divorced but has remarried. On his death, for argument’s sake, the husband wants the second wife to continue to live in the house, but would like the children of the first marriage ultimately to receive the benefit of the capital. It is a common circumstance and I should declare an interest in that it could relate to the circumstances of my parents. I know that there is a temptation to think that inheritance tax applies only to venture capitalists living in Belgravia, but it could relate to a retired police officer living in Lincolnshire.
The difficulty is that the Government tried to address the matter within proposed section 49A, but it did not work because the conditions set out were far too prescriptive and inflexible. As a consequence, there was a welter of professional advice—Labour Members might have resented it—saying that, in reality, most trusts created in such circumstances will have more flexibility than is allowed under the Finance Bill. I asked the precise question on the Floor of the House, when I said,
“the advice provided by professional after professional is that what the Government are proposing simply will not work. In nearly every case, there is a degree of flexibility”—
within the trust—
“for which the Government are not providing.”
The Paymaster General responded,
“the hon. Gentleman is saying that he does not believe me when I say that there is flexibility for a spouse or an ex-partner to receive an interest that is eventually passed wholly to a subsequent beneficiary. I am telling him that clearly, but he would rather believe people outside the Chamber than me and civil servants.—[Official Report, 2 May 2006; Vol. 446, c. 852.]
The right hon. Lady has been very gracious.

Dawn Primarolo: That is a statement of fact. When I speak to the amendments, I shall be making my intention clear. If anything, the hon. Gentleman challenged me personally about that point and he also challenged the legislation. As the presence of the amendments before us makes clear, my intention as a Minister was not delivered—I concede that, and I said it clearly on Second Reading and in Committee of the whole House—but the amendments will secure that intention.

David Gauke: May I put the exchange in context? Like the shadow Chief Secretary to the Treasury, my hon. Friend the Member for Chipping Barnet (Mrs. Villiers), I was addressing conditions 3 and 4. I said that the conditions were so drafted that the vast majority of wills created in such circumstances would create trusts in breach of them. It is correct that I challenged the legislation—that is precisely what I did, although I do not doubt that the Paymaster General’s intention was to allow it.

Dawn Primarolo: What is the hon. Gentleman’s point? Is he saying that my interpretation at the time of Committee of the whole House was incorrect? If so, why does he not just say that and then sit down and let me move the Government amendments?

David Gauke: Will the Paymaster General be patient, given that she was very gracious to my hon. Friend the shadow Chief Secretary this morning? I shall proceed as appropriate, because the Government may well have had a certain intention, but the reality was that they produced draft legislation that woefully failed to achieve it. The draft legislation did not allow the flexibility that exists in the vast majority of wills.

Dawn Primarolo: Would the hon. Gentleman like me to list all the occasions on which the same thing happened under the previous Government and up to 1997, because unfortunately they are not unknown? Shall I start with loan relationships?

David Gauke: May I just make my simple point without further interruption, because we want to proceed. [Interruption.] The hon. Member for Wolverhampton, South-West (Rob Marris) says that he is willing to bet that I do not speak to Mrs. Gauke like that, and he is absolutely right. Never a truer word has been said in the Committee. Nevertheless, the point that I am trying to make is that the Government produced legislation that was defective: it did not achieve what we understood to be the Government’s aims. The Paymaster General has said that the intention was to allow flexibility to cover the circumstances that I addressed. The point on which we disagreed is that I said it would not work, and she said it would—and I was right and she was wrong. That is the essence of it. [Interruption.]

Edward O'Hara: Order. I know that some hon. Members are getting worked up about exciting events at 5 o’clock, but could we have more order in the debate? Although the Minister deferred her right to speak when I called her, I invite her, once the hon. Gentleman has finished, to move her amendments. That might facilitate further debate.

David Gauke: Thank you, Mr. O’Hara. The question for the Committee is why the Government got it wrong, which comes back to the fundamental point about this trust legislation. On Tuesday, the Paymaster General said that there was a lot of confusion about the provisions. Sometimes, when she says that there is confusion, she actually means that there is disagreement with and opposition to her ideas, and there was a lot of disagreement with this idea, because the Government failed to realise that professionals would advise individuals to set up trusts in a practical way, and that there would be that flexibility. The reason why they failed to realise that was that they had not consulted; they rushed into the legislation for reasons that even now remain unclear, although I suspect that the Government were driven as much by political objectives as by trying to deter tax evasion. None the less, they made a mistake.
The Paymaster General was perhaps more gracious this morning than she has been this afternoon, but she has acknowledged that a mistake was made. However, in future legislation we should bear in mind the difficulties that are caused when something is rushed through in a technical area without the expertise of outside professionals who know how this works in practice. That is a serious mistake that the Government have made and they should not do so again.

Dawn Primarolo: The outside advisers are not too far away. Some of them are sitting in the Public Gallery. In tabling the amendments, as I made clear to the hon. Member for Chipping Barnet this morning in an intervention, I have not changed my approach. Nor has the Government’s intention changed. I well remember when such amendments had to be tabled in the past by Conservative Ministers—I see that the ex-Financial Secretary is leaving the room now. In accordance with what I explained to the House on Second Reading and in Committee of the whole House, what I require in terms of spouse relief is now provided in the amendments.
Would I have preferred not to have tabled the amendments? Yes. Could I have not tabled them? Did I really have a dastardly plan to get rid of spouse relief or to severely restrict it, as the Opposition suggested? I shall not be so ungracious as to quote back to the hon. Member for South-West Hertfordshire (Mr. Gauke) or his hon. Friend the Member for Chipping Barnet the number of times in Committee that the previous Government, or current members of the Committee, might have advanced something that was not accurate. It happens.
The Government amendments provide for the intentions that I explained to the Committee of the whole House. Even so, let us remind ourselves that very few estates pay inheritance tax. Some 94 per cent. do not. They do not come into the equation. The number of IHT-paying estates was 34,000 last year. The hon. Gentleman and the hon. Lady argued that millions of people would be dragged into the IHT net and would consequently have to revisit their wills, even though they know from their legal qualifications that solicitors and professionals advise people regularly to return to their wills. They were, let us be generous, rather overstating the case.
Many existing wills make outright bequests to the surviving spouse or are set up to ensure that both the husband and wife use the full IHT threshold with the so-called nil-rate band trust. These wills are quite unaffected by schedule 20. But where wills provide for a trust that is large enough to be potentially caught they will often either satisfy the conditions in schedule 20 or be brought into compliance after the testator’s death using the long-standing IHT provisions. The suggestion that millions needed to rewrite their wills might not have been as accurate as it could have been and might even have been an inflated number. However, as the hon. Lady said, the Government amendments will remove some of the conditions required to set up an immediate post-death interest. That will ensure that trusts set up on death to provide for a surviving spouse or civil partner will automatically qualify for the spouse relief.
If, at a later date, such an interest is terminated and followed by further trusts, IHT will be charged accordingly by reference to the facts at the time. That approach will accommodate the sort of flexible powers used in the more sophisticated arrangements. That flexibility will also make it easier for people thinking about providing for a trust in their will to be happy that those arrangements will be suited to a range of different circumstances.
Opposition finance spokespersons, and others, often do not express their views directly to the Minister concerned, but via circuitous routes such as the newspapers. The hon. Lady has also acknowledged that her amendments and those of the Government have the same intention. I acknowledge that in return. Her intention is clear, and if her amendments worked, I would be in a slightly different position and hopefully would be able to say to the Committee, “They work, and that is our intention.”
I said to the hon. Lady that although the consequential amendments cover broadly similar areas, they will not always work in practice. I do not advance that as a criticism; it is a difficult issue, and I acknowledge that the Government have access to parliamentary counsel, which is crucial in such circumstances. So there is a difficulty, particularly for the Opposition, but I hope that she will accept—I think that she already has—that the Government amendments cover the same territory. She was good enough to acknowledge this morning on a point of order that I said that on reflection I might have used slightly different language when approaching some of the subjects before us.
In conclusion to my remarks on the Government amendments, I would like to make it clear to the Opposition, who might wish to criticise the initial drafting, that I have not changed my mind and have delivered what I thought and was advised was in the Bill. That will be in the Bill if the amendments are carried, and it is better for that. I commend the amendments to the Committee.

Sadiq Khan: In view of the time, I hope that I shall be brief. I too commend the Paymaster General for her graciousness today and congratulate her on the Government amendment. She has been listening, talking and engaging with me and other colleagues for the last six to eight weeks.
I could not sleep last night so I did what most people do who cannot sleep—I went on the Conservative party website. I found a press release from 30 June entitled “Conservatives Force Brown U-Turn on Thrift Tax”. Members will be interested to note that the first paragraph read:
“Gordon Brown has ordered a major Government U-turn on his controversial new tax on trusts, following a sustained campaign of opposition by the Conservatives.”
I did not read the rest because it did the trick and I fell asleep.
I also received a press release from the Society of Trust and Estate Practitioners. I understand that a constituent of one of the Opposition Members here today works for that organisation. That press release said:
“Following strong representations from the Society of Trust & Estate Practitioners (STEP) and other professional bodies, the government has returned to the pre-Budget position for spouses safeguarded by trusts in wills.”
I am sure that Opposition Members are concerned that the Financial Times sought to give credit to STEP, not the Conservative Opposition, who are noteworthy for their ability to get publicity on what they assume to be major issues.

Theresa Villiers: The Opposition do not mind who takes credit for it; the important thing is that the Government have changed their mind and are going to withdraw the damaging proposals.

Sadiq Khan: I am pleased that I gave way, because that is my beef—I think that I deserve the credit, and I am kicking myself for not putting out a press release.
The Paymaster General has spent hours talking to me and my colleagues, meeting concerned representatives and putting out reassuring messages. In The Guardian of 8 May, the Treasury is quoted as saying:
“The government has provided for the position where a trust set up on death allows a widow to live in the family home as a life tenant with the asset passing to other family members on the widow’s death. This arrangement is exempt from the new IHT rules. We are now exploring how to ensure that trusts set up in accordance with Sharia law”—
—condition 3, to which the hon. Lady referred—
“can benefit.”
The scaremongering that has gone on for the past six to eight weeks has not helped literally tens of constituents—I say tens rather than the millions referred to by tax advisers.

Theresa Villiers: The hon. Gentleman may think that it has not helped, but it seems to have had an effect.

Sadiq Khan: Some might say that the discussions taking place with the Paymaster General have been more constructive, and they may want to put out a press release to claim credit.

David Gauke: Those of us who took part in the Committee of the whole House will remember that an excellent speech was made by the shadow Chief Secretary—and not quite such an excellent speech by me. I do not recall the hon. Gentleman contributing to the debate. The reaction of the Paymaster General to Opposition Members who made precisely those points on conditions 3 and 4 was generally to abuse them. I do not remember the hon. Gentleman joining in.

Sadiq Khan: May I say once again that I am grateful for that intervention? Some of us ex-lawyers have spent the last year finding out about the procedures of Parliament, and I understand that on Second Reading and during the Standing Committee stage things often change. Indeed, it is possible that a constructive and sensible Paymaster General might listen to the discussions while the legislation is going through the House rather than making cheap points. During the past 13 months, rather than boasting of the fact that I am a lawyer with a practice certificate, I have come to understand how the parliamentary process works. When the Paymaster General and the Treasury are willing to listen to the concerns of ordinary residents and, dare I say it, of hon. Members on the Government Benches—that is the way to achieve progress.

Edward Balls: For the record, I wonder whether Mrs. Khan has any views on the matter?

Sadiq Khan: Mrs. Kahn kept her maiden name, which shows the strength of her personality; she is known as Ms Ahmad. I am pleased to say that she does not have an opinion on these matters, and I hasten to say that that is a relief to me.
I and others who expressed concern were genuinely pleased and we congratulate the Paymaster General on the amendment. My right hon. Friend is aware that although one of the conditions referred to people in second marriages—it was alluded to by Opposition Members, and I shall return to those details later—another group of people could have suffered had the amendment not been moved. I speak of those who wish to practise the Islamic faith.
My right hon. Friend is aware that, under sharia law, the requirements when someone dies are predetermined. Had the amendment not been moved there would have been an unfairness. I am grateful to my right hon. Friend, as it will mean that those who benefited previously will continue to benefit.
For the record, although I do not want to talk about the loopholes that have now been closed, it is important to recognise that the Government want to make an amendment. I congratulate my right hon. Friend on listening during the past six to eight weeks, and I look forward to the entire Committee supporting the amendments.

Julia Goldsworthy: I shall be brief, because I know that hon. Members are keeping an eye on the clock.
The hon. Member for Tooting (Mr. Khan) said that his wife, Ms Ahmad, did not have an opinion on the matter. That comes as a surprise, because a huge number of people have expressed an opinion, and a number of organisations, accountants and solicitors have contacted me. It is surprising that more people have not tried to claim credit for the changes in the Bill.

Dawn Primarolo: Does the hon. Lady think that a new consensus might be emerging? If we could agree that it is, could we move on to the next debate?

Julia Goldsworthy: I will be very brief. Our original concern about the Bill was that the spouse exemption would depend on what happened consequentially and those conditions have been removed. The Government amendments do the same thing as the Opposition amendments so we have no problem in supporting them.

Theresa Villiers: It must be unprecedented for the legal profession to receive so many warm endorsements in one afternoon. STEP and the professional groups deserve the bulk of the credit for the changes that have been made.
The Paymaster General disputed the figures on the number of wills affected. It was a cautious estimate that a million wills would have been affected and the reality, as I said, is that many more wills contain trusts than trusts that actually come into effect. When wills are drawn up by professionals for people with children they are likely to contain a trust. We discussed at length, and it was disputed, that anyone with a house in the south-east of England is likely to have to take into account the possibility that their estate will be liable to inheritance tax. A huge number of people would have been affected by a rule that effectively slapped these new charges on every life interest trust set up on death. That threat has been averted.
There are still problems with the Bill. Many people will have to review their wills as a result but the Government amendments significantly mitigate the problem and I welcome them. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendments made: No. 359, in page 115 [Vol II], leave out lines 12 to 25.
No. 360, in page 115, line 30 [Vol II], leave out
‘Conditions 3 to 5 have'
and insert ‘Condition 5 has'.
No. 361, in page 115, line 32 [Vol II], leave out from beginning to end of line 18 on page 116.—[Dawn Primarolo.]

Theresa Villiers: I beg to move amendment No. 354, in page 116, line 8 [Vol II], at end insert
‘or
(c) L is excluded from exercise of the power or participation in its exercise wholly to ensure compliance with religious rules.'.
The issue to which this probing amendment relates has been resolved by the amendments that the Committee has just accepted. I tabled the amendment to highlight sharia law, to which the hon. Member for Tooting (Mr. Khan) has already adverted, a matter which is sufficiently important for the Committee to spend at least a few minutes of its time discussing.
The amendment proposed that condition 3 be adapted so that it would not prove to be a bar to the creation of an immediate post-death interest when condition 3 was not met purely as a result of the observance of religious principles. I was in two minds whether to table the amendment because of the extreme difficulty of drafting anything that worked in this context. The deletion that has just taken place is by far the preferable option, getting rid of condition 3 altogether.
I shall outline the problem that has now been solved. Many in the Muslim community were concerned that, because of condition 3, sharia-compliant trust arrangements would be penalised by the new IHT charge. Sharia law lays down principles as to how property should pass on death. I understand that, in most cases, widows are entitled to only one eighth of the assets, and widowers to a quarter. The balance has to be split between children and surviving parents. Those rules create two serious problems in relation to outright gifts: they might leave the widow with insufficient property on which to live, and the spouse exemption will apply to only one eighth of the property. If most of the estate consisted of the family home, the IHT charge could necessitate its sale, leaving the widow, possibly with children, without a home.
To deal with that problem, and enable Muslim families to comply with sharia law while ensuring that the spouse is properly looked after—

Rob Marris: On a point of order, Mr. O’Hara. I note the eloquence of the hon. Lady. However, my understanding is that amendment No. 354 seeks to amend words that amendment No. 361 has just removed from the Bill. If I am wrong, please could you direct me, and if I am right, what is the procedure?

Edward O'Hara: I thank the hon. Gentleman; there is an anomaly in the papers before me. He is absolutely correct that if amendment No. 361 has been agreed by the Committee, then amendment No. 354 falls.

Dawn Primarolo: I beg to move amendment No. 385, in page 116, line 23 [Vol II], after ‘only' insert ‘— (a)'.

Edward O'Hara: With this it will be convenient to discuss the following: Government amendments Nos. 386 and 387.
Amendment No. 267, in page 118, line 5 [Vol II], at end insert—

‘Policies of insurance

7A (1) In section 6 of the Inheritance Tax Act 1984, after subsection (3) insert—
“(3A) Any policy of insurance comprised in a settlement shall be treated as excluded property for all purposes of this Act.”.'.
Amendment No. 268, in page 118, line 5 [Vol II], at end insert—

‘Policies of insurance

7A (1) Any policy of insurance which was comprised in a settlement at 22nd March 2006 shall be treated as excluded property for the purposes of the Inheritance Tax Act 1984.'.
Government amendment No. 391.
Amendment No. 379, in page 122, line 34 [Vol II], at end insert—
‘(2A) After sub-paragraph 1(f) insert—
“(g) property in the form of a life protection policy;
(h) proceeds from a life protection policy, within two years after any death giving rise to benefits under the policy.”.'.
Amendment No. 380, in page 123, line 20 [Vol II], at end insert—
‘19A After section 58(3) insert—
“58 (4) In sub-paragraph 1(g) and 1(h) above a ‘life protection policy' is a policy where the benefit arising on any death or disability is at all times no less that a number equal to 10 multiplied by the highest premium paid in any period of 12 months.”.'.

Dawn Primarolo: The Government amendments relate to instances in which people put life assurance policies into trust before Budget day. After the Budget, there was a lot of speculation in the media about the fact that people who had such policies in trust would be affected by the rules in schedule 20. The Committee will recall that the Government clarified the position when the Finance Bill was published. There is, dare I say it, an acknowledgment on the website of Charles Russell solicitors that those fears were not justified, and that the explanatory notes made that clear. An HMRC guidance note issued alongside the Bill made it clear that existing life assurance policies written into trust before Budget day were either not affected—because they used so-called bare trusts, whose treatment has not changed—or were effectively grandfathered by the legislation.
Since then, officials have held discussions with representatives of the insurance industry. One area of concern was that although they understood and accepted HMRC’s view that schedule 20 had not affected pre-Budget trusts holding life policies, they felt that they would still like it to be explicitly mentioned in the Bill. They agreed that it was not necessary, but wanted it in the Bill because that would help them to give reassurance to their clients who had, presumably, seen all the press speculation and needed such reassurance.
I have given the matter considerable thought. It is not normally my practice to amend a Bill unnecessarily. However, in a spirit of generosity, even though it was not my press speculation, I thought that it was appropriate for the Government to respond, because people were worried about that and needed reassurance. The amendments would mean that schedule 20 made explicit provision for life insurance policies in pre-Budget trusts. I understand and appreciate why those who are making representations thought that that was now the best way forward. I thought that that was the right way to proceed.
In respect of the policies, the amendments would create a new class of case eligible to be treated as a transitional serial interest for life insurance policies placed into trust before Budget day. Government amendments Nos. 385 to 387 would insert a new section 49D to extend the scope for interest in trusts holding pre-Budget life policies to qualify as a transitional serial interest. In such cases, the life insurance policies held by the trust will be treated as being owned by the person having the interest in possession in trust, whereas for someone holding an interest in possession where the trust asset at the time the interest commenced was, or included, a pre-Budget life insurance policy, the interest will be treated as a transitional serial interest, so far as the life policy is concerned if specified conditions are satisfied.
The first condition is that the policy was already held in the settlement on Budget day and was subject to an interest in possession at that date. The second condition is that the current interest in possession either arose on the death of the person who held the interest on Budget day, arose on the death of someone holding a transitional serial interest in succession to them, or on the death of someone holding a transitional serial interest by virtue of a previous application of section 49D. That means that where a person has the interest in possession in a pre-Budget trust holding a life insurance policy, but dies before the person whose life is insured, they can be replaced as the person without an impact in the transitional treatment will continue.
The third condition is that the life policy has been held in trust in question throughout the period from Budget day to the start of the current interest in possession. The fourth condition will mean that transitional serial interest treatment is only due where the interest in question would not also qualify as a trust for a bereaved minor or as a disabled person’s interest. That is because it is clear that such trusts are eligible for the same IHT treatment as a transitional serial interest.
Amendment No. 391, the final Government amendment in the group, would insert a new paragraph 10A into schedule 20, thereby making it clear that an interest in possession that existed before 22 March 2006 in a life policy placed into a trust before that time is to be treated wholly as a pre-Budget interest in possession. It also confirms that the policy is wholly an asset settled on the trust before the Budget, even if some premiums are paid after Budget day. The new section 46A also provides for the situation where a right inherent in the life insurance policy is exercised after Budget day. In that case, where the life insurance policy continues to be held in the trust after the exercise of that right, the trust continues to qualify.
Finally, new section 46A clarifies that premiums paid post-Budget in relation to a life insurance policy as originally placed into the trust pre-Budget, or following the exercise of a right, will continue to be treated as a potentially exempt transfer if they are made by an individual. Proposed new section 46B provides for treatment equivalent to that under new section 46A for a life policy that was held in accumulation and maintenance trusts on Budget day and premiums are paid on or after that date.
In summary, our amendments will clarify that the pre-Budget position for life insurance policies placed in trust before Budget day is preserved and how post-Budget premiums on such policies will be treated. 
In contrast, the Opposition amendments in this group would have a much wider result and would make an existing or future insurance policy held in trust totally IHT exempt. Some IHT avoidance has used trusts and life insurance and if the amendments were accepted, there is a risk that they could lead to more tax avoidance than under the pre-Budget laws. Everyone agreed that the Government amendments provide the necessary clarification of how schedule 20 will work. They will make clear, for example, that the position of payments made after Budget day under a pre-Budget date contract will not be changed. I do not see any reason to make further comments on the matter.
The Opposition’s amendment No. 268 would treat as excluded property policies put into trust on Budget day. Under our proposals, the new rules will apply to such arrangements. The amendment would make any insurance policy held in trust on Budget day totally exempt, which would go too far and regrettably could be exploited. Pre-Budget policies would remain permanently exempt even when given or sold to succeeding owners, which I cannot accept.
Opposition amendments Nos. 379 and 380 would define protection policies held in trust and exempt them from the periodic exit charges on trust property. They would also exempt the proceeds of such policies for two years after the pay-out. The Opposition would argue that that is justified on the basis that there is no tax avoidance motive and that keeping the policies chargeable would involve excessive compliance costs. Again, I disagree. Protection policies can be valuable property, particularly under the generous definitions adopted in the amendments. Exempting them could encourage avoidance and further distortions, particularly of competition. In most cases the impact of IHT will be small, arising only on amounts over the nil band. It will catch only the largest cases, and even then the tax will be at the lower rate of the periodic charge in proportion to the length of time for which insurance proceeds remain in trust.
Furthermore, there is ample scope for protection policies to be employed as part of the unfair IHT avoidance schemes that the provision is designed to counter. Somebody might, for example, take out a protection policy that would pay off their mortgage if they were to die unexpectedly. By putting that policy into trust at an early stage, the proceeds would be exempt from IHT on their death and any amount outstanding on the mortgage would be deducted from that person’s estate for IHT purposes. Their beneficiaries would get their money but not have to pay off the mortgage. As hon. Members will be able to see, there is therefore no reason why such activities should fall within the new laws.
Despite its having been agreed that the guidance notes made it clear that insurance policies were outside the scope of the schedule, because of the persistent view to the contrary and therefore the need to reassure holders of such policies, the Government have included wording in the Bill. In the end, the ABI decided that that would be the best way forward, even though it accepted that insurance policies were outside the Bill.
The Government are making the position clear and are responding in a sensible, precautionary way. I therefore commend the Government amendments to the Committee but, for the reasons I have given, I will ask my hon. Friends to oppose the hon. Lady’s amendments should she put them to the vote.

Theresa Villiers: As we heard, all the amendments in this group seek to address concerns about the impact of schedule 20 on insurance policies written in trust. I have put forward various options for dealing with the matter. I acknowledge that amendments Nos. 267 and 268 are wide-ranging. They are probing amendments to enable the Committee to explore the issues surrounding the problems that have been outlined by the Paymaster General. Amendments Nos. 378 to 380 are more narrowly focused and are not intended to be mere probing amendments. I hope that the Committee will consider them seriously.
Before turning to the amendments, I want to set out the problem that they are designed to address. The Committee should be in no doubt that it is serious. The Paymaster General believes that the anxieties caused in this instance were unnecessary and based on scare stories, but I repeat that they were caused by genuine anxiety that the legislation would catch and penalise several large insurance policies in a way that has never been the case before.
I am sure that the Paymaster General is aware that Prudential and Standard Life have suspended selling life products under trust because of the uncertainty caused by the schedule, and, as we heard, the ABI has also expressed serious concerns about its impact. I hope that she might consider meeting them and other representatives of the insurance industry to discuss the matter further.

Dawn Primarolo: I am grateful to the hon. Lady for giving way. On this point, I shall say what has been said by organisations. On the Finance Bill, the ABI stated:
“We welcome the Guidance Note produced by HMRC today. It now appears, subject to further discussion, that the Government’s proposals will not affect large numbers of people with existing life policies in trust. This is a positive outcome”.
That was on 7 April. At that point, with some further clarification on wording, it was acknowledged by the ABI that the points about large numbers had in fact been clarified and were no longer a concern. I could take that further. There may be some disagreement, but it is not coming from the entire ABI.

Theresa Villiers: I draw the Paymaster General’s attention to a letter that I believe the ABI sent to all members of the Committee in support of my amendments. It states that the Government have laid amendments specifically on life assurance issues that are helpful but limited, in that they clarify that certain although not all pre-22 March arrangements will not be brought into the new regime, but the Government do not have new arrangements involving insurance policies going forward.
If the Paymaster General is concerned about the views of the ABI, I hope that she will consider my amendments seriously.

David Gauke: May I inform the Committee that I have just stepped outside the Room and spoken to representatives from the ABI? Contrary to what the Paymaster General has just said, although the ABI believes that the guidance notes are helpful, it is not satisfied with the drafting of the Bill. I received representations in the past minutes to that effect.

Theresa Villiers: I thank my hon. Friend for that intervention.

Dawn Primarolo: On a point of order, Mr. O’Hara. I want to give notice to the Committee that the ABI made direct representations to the Government, specifically on whether or not my policies were in case, and then responded directly to the Government, following clarification. I cannot account at this time for the point from anybody who is at the back of the Room, but I undertake to get to the bottom of it, and will inform the Committee.

Edward O'Hara: I understand what the right hon. Lady is saying, but it is not a point of order for the Chairman. It is a matter of debate between the two sides of the Committee.

Theresa Villiers: I am sure that representatives of the insurance industry will welcome the opportunity to discuss the matter with the Paymaster General. The problem here is that the new proposals, as we have heard, would impose IHT charges on life policies other than trust. The Government do not appear to have appreciated when the Bill was published that very large numbers of life insurance policies are already in trust to family members. Almost invariably, such trusts are set up during the settlor’s lifetime, so schedule 20 could inflict the new IHT charges on millions of people across the country who hold life insurance policies. Skandia Life estimated that 4.5 million people would have to renew their policies as a result.
As we have heard, the Government initially asserted that those fears were groundless, but in the wake of the deep concern that greeted the announcement of the Government’s proposals on schedule 20, an attempt to reassure on this point was rushed into the electronic copy of the explanatory notes. It came too late for the hard copy, but no specific provisions were included in the Bill. It seems that the Government’s view that schedule 20 would not cause problems was based on the legal interpretation that premium payments were not additions to the trust because they were made pursuant to the terms of the policy contract. That legal interpretation is certainly contested and, even if it is valid, did not provide the answer where insurance polices were settled on accumulation and maintenance trusts. It was clearly necessary at an early stage to clarify the issue in the Bill, and I welcome the moves that the Government have made towards doing that. Even though the Paymaster General seems to think that the amendments are not necessary, I welcome her decision to table them. It is vital to lift the threat of the new IHT charges on life insurance for the following reasons.
First, because after imposing new IHT charges on such policies—they are new, because, as far as I am aware, they are not imposed at present—in order to discourage imprudent behaviour, as with many other aspects of schedule 20, it would be perverse to try to penalise those trying to plan and provide responsibly for their family’s financial future. As the ABI points out in the notes circulated to the Committee, from which I have quoted already:
“Life insurance provides a vitally important financial protection for individuals and their families in the event of early death or serious ill health. As well as causing obvious emotional distress, such events often cause severe financial pressure if the victim is the main income provider. Most families are probably seriously under-insured and it would be foolish to provide a real tax disincentive to responsible behaviour. Where people provide for unforeseen setbacks with life policy insurance, they are actually less likely to find themselves resorting to the state and the benefit system for help when these risks materialise.”
In support of the amendments that I have tabled, the ABI stated:
“We consider there is an overwhelming case that the use of life insurance to protect against financial hardship should be promoted by the government. This is because life insurance provides the means for those on even modest incomes to be self reliant and not dependent on the state for hand-outs... As drafted, this current legislation penalises prudence and therefore should be amended.”
The second reason why it is desirable and necessary to amend schedule 20 is that so many millions of life insurance policies were written in trust. Such trusts are set up for a number of reasons. First, setting up a trust means that they fall outside the estate of the insured person and the pay-out could be made straightaway, rather than having to wait for probate. Secondly, a trust structure gives the insured life much more flexibility regarding who benefits from the policy, whereas an outright assignment is inflexible and difficult to do. Thirdly, a trust structure can be particularly useful in giving trustees flexibility to provide for children who are under 18 when the settlor dies. Preventing trusts from being used in this context by imposing new IHT charges would close off access to important and much-needed flexibility to the way in which such policies work, would push up costs, and would deter people from taking the prudent step of insuring themselves against the risks that I have described.
The third reason why the amendments are necessary is that there are significant practical problems with the way in which schedule 20 charges would apply to life insurance. They give rise to arbitrary distinctions. These flow from the fact that the value of the policy will fluctuate according to the likelihood that a claim will be made. Put simply, the value depends on the health of the person insured. Such policies have no market value unless the insured person is terminally ill. 
If the 10-year anniversary of the trust occurs when the insured person is fit and healthy, its value will be minimal and no inheritance tax will be payable because the value of the policy will be below the nil rate band. If, however, someone is seriously ill or has recently died just before the 10-year anniversary, that would push up the value of the policy, the threshold of the IHT charge would be breached and inheritance tax would be payable.
The proceeds generated by such policies have to be considerable to provide bereaved families with sufficient income on which to live. Therefore, the value of the policy pending imminent death, could easily be above the threshold where the insured life is seriously ill. The best way to make the point is via examples. They demonstrate some of schedule 20’s potentially harsh consequences in that context.
We will take an example of Mr. A who has a 20-year term policy in trust for his wife and children. It will pay out half a million pounds on his death. That will provide the modest income of £25,000 a year for his family to live off, based on a 5 per cent. return. In scenario one, Mr. A dies after 8 years. All the proceeds of the policy are paid out before the 10-year anniversary, and there is no IHT charge.
In scenario two, Mr. A dies after nine and a half years. However, the trustees were not able to pay out the proceeds by the 10th anniversary. The proceeds from the policy are still in the trust and they are taxable.
In scenario three, Mr. A dies in year 11. At the 10th anniversary, he was not ill or not aware that he was ill and put no value on his term policy. Therefore, the policy was not considered valuable and no IHT was payable at all.
In scenario four, Mr. A finds that he is diagnosed with terminal cancer after nine and a half years of the trust. His policy is considered to be worth £390,000 at the 10th anniversary. Inheritance tax will be payable. At that stage, he has no funds and cannot work, so he has to borrow the money to pay the IHT. Technically, the trustees should pay the tax but they do not have any assets in the trust from which to pay. Therefore, it would be down to the insured life. When Mr. A dies, the loan can be repaid. However, it reduces the amount of money available for the family.
In scenario five, Mr. A finds that he is diagnosed with terminal cancer after nine and a half years of the trust. His policy is again considered to be £390,000 at the 10th anniversary. He therefore uses a loan to pay inheritance tax at 6 per cent., as discussed in the previous example. He goes into remission and survives for another 15 years. The policy comes to an end without paying a claim. Therefore, he has paid IHT using a loan that never received any payment from the policy and has to find the money to repay the debt that he incurred to pay the tax.
Turning to the various options presented by the amendments, amendments Nos. 267 and 268 are alternatives to one another. Both seek to insert a new paragraph 7A into part 3 of schedule 20 on related amendments to Inheritance Tax Act 1984. They are probing amendments, designed to give the Committee the chance to explore the options. Amendment No. 267 is the most radical on the table. It proposes to treat insurance policies as excluded property and as permanently outside the IHT regime. It would achieve this by adding a new paragraph 3A to section 6 of the Inheritance Tax Act 1984. Section 6 contains the excluded property regime that determines what type of property is considered to be part of an estate for IHT purposes.
Amendment No. 268 is less radical and gives assistance to those who hold existing insurance policies. It puts forward the simple option that all insurance policies should, as a transitional measure, be outside the Inheritance Tax Act, if they were already on trust before 22 March 2006.
I was willing to listen to what the Paymaster General said. I acknowledge that there could be avoidance problems with those amendments. Therefore, I will not be pressing them to a Division. However, I will be asking the Committee to consider amendments Nos. 379 and 380. They are much more tightly focused. Instead of amending the excluded property principles in section 6, they seek to amend the relevant property regime set out in section 58. Unlike amendments Nos. 267 and 268, which would apply to all insurance policies, amendments Nos. 379 and 380 would distinguish between different types of insurance. They would take policies out of the framework for the new charges where those policies are designed to provide for future uncertain events such as the death of a wage earner, critical illness in the family, funeral expenses or something of that nature. In this context, life insurance is very much like insuring a car or a home. It provides a pool of money in the event that an unfortunate risk materialises.
Most people would take the common-sense view that such an insurance policy may never pay out—not as a valuable asset, but as a cost against a future uncertain event. The amendments are intended to leave inside the scope of the schedule 20 charges policies that are primarily savings and investment vehicles. Again I rely on the ABI to draw that distinction. It states that it is
“concerned about the impact of Clause 157 and Schedule 20 on individuals buying life insurance policies to protect their dependants following death or serious illness. The Government's aim is to ensure that tax is paid on the transfer of wealth out of an estate. We believe that insurance policies that protect against uncertain unfortunate events can be clearly distinguished from wealth generating assets such as cash, real estate or investments. These policies are not generally wealth generating assets and the individuals who take out such policies are not the rich elite that the Government has indicated that it is targeting. The insurance policies concerned allow prudent policy holders to provide for their dependents thus removing the need for the family to be a burden on the state”.
The types of policies that it is intended will fall within the carve-out and therefore not be subject to the new charges under schedule 20 are term insurance, whole life insurance and critical illness cover. Term insurance gives protection if the insured party dies within a particular period. Such policies are often taken out to cover periods of higher family expenses, such as when children are growing up. If the insured survives the specified term, there is no pay-out.
The second type of insurance is known as whole life insurance. Those policies pay up whenever the relevant death occurs. Unlike the previous category, there is no specified term. The third type of insurance is critical illness cover. Those policies provide cash assistance for families in the event that such illness hits the main breadwinner.
It is difficult to draft an amendment that draws a clear distinction between savings products and risk-based products. This set of amendments would probably embrace some of the smaller savings plans, but the larger ones would be excluded by the limitation in amendment No. 380 that the benefit arising on any death or disability is at all times no less than a number equal to 10 multiplied by the highest premium paid in any period of 12 months. For a savings product, where there is no significant risk that has to materialise before it pays out, the premiums are likely to be closer to the benefit paid. There would not be such a large disparity between the level of the premiums and the benefit that is paid out. In that way, the amendment targets the risk-based insurance products.

Rob Marris: Would not amendment No. 380 be susceptible to manipulation by somebody deciding whether to pay 12 monthly instalments in a year in contradistinction to paying one premium per year, because the multiplicand would be different in both cases?

Theresa Villiers: The amendments cover the highest premium, so it does not matter if one manipulates the premiums in different ways. The provision would bite on the highest premium, so that would prevent avoidance of that nature taking place.

Rob Marris: What if somebody chose to pay a premium 1/365 of an annual premium of £365? One would end up with £10. I do not think that that is what the hon. Lady is intending.

Theresa Villiers: The figure cannot be distorted, because the highest premium will be the longest.
I acknowledge that there are concerns about an approach that provides special treatment to one particular type of property, but we are left having to draw that distinction, as do the Government amendments, as a result of the problems with the structure of the original draft of schedule 20. It is not ideal to treat different types of properties differently for the purposes of inheritance tax in this context, but I feel that we have no alternative.
Turning to the Government’s amendments, I welcome the fact that the Government have sought to respond to the concerns that I raised on Second Reading and in Committee of the whole House, and that Liberal Democrat Members and those professional groups to which we have repeatedly referred during this Committee have also raised. However, the changes to life interest trusts and IPDIs do not assist in this context, because they relate to changed trusts set-up on death and, as I said, insurance-based trusts are set up on life. Amendments Nos. 385, 386, 387 and 391, which focus specifically on insurance, are a step in the right direction, but only a timid step. Skandia Life issued a statement on Monday on the proposed changes:
“The latest amendments do not go far enough to reduce the number of life policies trusts or wills that need to be reviewed...Contrary to recent reports of a U-turn by the government, the government's changes announced last week are only a small, albeit welcome, step in the right direction. The introduction of the budget changes (even as now amended) should be postponed to allow time for the proper consultation that is needed to ensure all issues are properly considered.”
It supports the amendments, as I indicated in response to the Paymaster General’s intervention. As I said, it supports my amendments Nos. 371 and 380, because it believes that the Government amendments do not go far enough.
The problems with the Government’s amendments are as follows. If I am incorrect in my understanding on any of these points, I should be pleased if the Minister would correct me. First, obviously, the amendments do not cover policies written in trust on or after 22 March 2006, so all future policies could be potentially hit with the new charges. Thus the deterrent effect on people’s decision to provide for their future occurs in relation to all trusts of life insurance policies that were entered into after 22 March.
Secondly, the Government amendments are not completely effective in delivering on the Paymaster General’s understanding that no pre-22 March policies would be hit with the new charges. I understand that the new charges will still apply where there is a change of beneficiary, unless that change is the result of a death. Therefore, if the insured life has a new baby, for example, and changes are then made to the entitlements under the policy, that would count as a new settlement and the new rules would apply. That results from the wording of condition 2 in subsection (3) of the proposed new section 49D set out in Government amendment No. 387.
Thirdly, I am told that there is a problem where a beneficiary with a life interest has it removed, perhaps because he has fallen out with the insured life, but remains a potential beneficiary. That could be so if the trust has the children of the insured life as potential beneficiaries, so the life tenant remains part of that class although the life interest has been removed. Once the child has the interest in possession removed, but the class of beneficiaries is not amended to exclude him forever, I have been advised that because of the operation of the new section 102ZA, which paragraph 33 of schedule 20 would insert into the Finance Bill 1986, the loss of the interest in possession will be treated as a gift within schedule 20 and will trigger the reservation of benefit rules. Thus the policy is still treated as part of the estate of the former life tenant and when he dies, possibly years later, the trust will have to pay out a 40 per cent. IHT charge in respect of his estate. I should welcome the Paymaster General’s reassurance on either of those two points.
Lastly, the uncertainty about and continuing threat of new charges still casts a shadow over existing policies that may have to be reviewed. The Government amendments are complex and opaque and provide that the life insurance policies that provide help in the event of death or critical illness are potentially subject to additional IHT charges.
I ask the Government to look again at this matter. I am delighted that they have chosen to respond to the concerns that have been expressed, but continued concerns remain as to the effectiveness of the Government amendments in delivering the objectives that the Paymaster General set out in her presentation to the Committee.

Julia Goldsworthy: The Association of British Insurers said that the current legislation should be amended to remove unfair taxation and to provide clarity. As the hon. Member for Chipping Barnet said, in its covering letter it refers to the Government amendments as “helpful but limited” in what they clarify. That is a polite way of putting it, because the briefings that I have had from the Institute of Chartered Accountants in England and Wales were slightly less polite, describing the amendments as incomprehensible.
I understand what the Government amendments seek to do. They respond to pleas from the industry to put in the Bill many of the remarks in the explanatory notes. However, in addition, is the Treasury prepared to make public the legal advice that it took on this issue that led to its conclusion?
The Government amendments make efforts to ensure that life insurance policies taken up before the Budget are not affected, but why have the Government not applied that principle in other cases that we have debated? As has been said, life insurance policies are not set up to avoid inheritance tax. They insure against death or ill health, so that if someone unexpectedly dies, the value that materialises replaces the income that would have been earned or helps to cover mortgage loans.
I should declare an interest, because I was in the process of buying a house around the period of the Budget, and I have taken out a life insurance policy to cover that purchase. I have no idea whether it falls before or after the change, and I will have to go back to the policy to see how it applies and how I will be covered—although I will not be over the inheritance tax threshold. Presumably at some point I may do so and some of the changes may apply.
As the proposals stand, they create a kind of lottery about whether there is liability to tax. For example, someone who dies just before the 10th anniversary will pay tax but someone who dies just after it will not. Obviously, it is not possible to plan for death; people will not be seeking to avoid paying tax by bringing forward or trying to delay their death. I hope that the Minister will be able to respond to those two issues.

Dawn Primarolo: I can answer the last question immediately: no, I will not make the legal advice available. The hon. Lady has asked me that a number of times on different issues. The Government are entitled to legal privilege, just as anybody else is. As we are always being pressed to make sure that we do not breach privilege, I am sure she will understand that the same applies to Government advice.
I have made clear why I think that the amendments tabled by the hon. Member for Chipping Barnet would open up avoidance. The ABI was clear on 7 April; that is where the quote came from about the millions who would be caught by the provision. The Government amendments will ensure that policies held before the Budget—those were the ones that were criticised because they would be caught by the provision—will not be caught. Even though that was made clear and accepted with the guidance, the ABI nevertheless took the view that reassurance was necessary. Presumably there had been so much speculation that there would be problems and that it would be easier if such provisions were in the Bill. Unusually, although I am beginning to wonder why, I saw some merit in that proposition, and that is what the Government amendments do.
What the Government amendments do not do, but the hon. Lady’s amendments would, which is why I will not accept them, is include new policies taken out after Budget day, because they are different. As I set out in my opening remarks, one particular reason for that is that this is an area of avoidance. As some companies have been quoted, perhaps I will quote comments from their websites about the purpose of the policies.
Let us start with Skandia. On 17 June 2005 a press release was issued about the large growth in that company’s business and profits, which identified the source of the growth. It said that matters
“driven by UK capital appreciation and lower real tax thresholds, continue to drive demand for inheritance tax solutions, boosting this segment of Royal Skandia business.”
So Skandia is quite clear what its policy is for.
On life policies, let us consider the “Secure Estate Plan”, which says that it offers a solution to minimise IHT liability whilst still maintaining lifestyle, and that it immediately reduces the value of the estate for IHT purposes. Alternatively, we could examine the “Discounted Gift Plan”. That suggests that one could reduce the value of one’s estate for inheritance tax purposes by paying a lump sum—anything from £50,000 or more—into that vehicle. You will be relieved to hear, Mr. O’Hara, that I have only a small sample of websites. The final one that I shall mention is that of Westerby Investment Management Ltd, which refers to three practical methods of avoiding inheritance tax. One of them is a joint whole-of-life insurance policy written into trust for the benefit of the heirs to the estate. The document then sets out the necessary steps.
That is why there are new demands to include new policies, even though, for the reasons that I have identified, the Government believe that such policies are designed for specific purposes. The schedule is designed to prevent such avoidance, so the Government have adopted the original position of the ABI, which covered policies that were already in existence. When the ABI came back and asked that new policies be covered, the Government declined amendments to that effect, and they still decline them today in the form moved by the hon. Member for Chipping Barnet.

Theresa Villiers: I should welcome it if the Paymaster General could address my points on the failure of her amendments to cover all policies dating from before 22 March. I understand that such policies would not come within the scope of her amendments and would therefore be subject to charges. As I have said, I shall not press my initial two amendments to a Division, but I should be grateful if the Committee were prepared to vote on amendment No. 379, because it deals with an important issue. Life insurance policies that focus on mitigation of risk, rather than being savings products, should not be subject to the new charge.

Amendment agreed to.

Edward O'Hara: Amendment No. 379 is being pressed to a vote, but that will come later.

Theresa Villiers: I beg to move amendment No. 298, in page 116, line 23 [Vol II], after ‘if', insert
‘section 49D below applies or'.

Edward O'Hara: With this it will be convenient to discuss the following amendments:
No. 295, in page 116, line 29 [Vol II], after ‘possession', insert
‘or was property to which section 71 applied'.
No. 229, in page 116, line 30 [Vol II], after ‘that', insert
‘unless B is the spouse or civil partner of the person beneficially entitled to the prior interest'.
No. 296, in page 116, line 31 [Vol II], leave out
‘but before 6th April 2008'.
No. 299, in page 116, line 37 [Vol II], at end insert—
‘49D Alternative condition to be transitional serial interest
(1) Where a person (“B”) is beneficially entitled to an interest in possession in settled property (“the current interest”) for the purposes of this Chapter that interest is “a transitional serial interest” if the following conditions are met.
(2) Condition 1 is that—
(a) the settlement commenced before 22nd March 2006, and
(b) immediately before 22nd March 2006, the property then comprised in the settlement was settled property to which section 71 applied.
(3) Condition 2 is that B became beneficially entitled to the current interest in that property after 22nd March 2006 but before 6th April 2008.
(4) Condition 3 is that until B became entitled to the current interest the property remained property to which section 71 applied.
(5) To determine whether section 71 applied for the purposes of Condition 3 above, the amendments to section 71 made by paragraph 3 of Schedule 20 to the Finance Act 2006 are to have effect.'.

Theresa Villiers: These amendments can be divided into three groups. Amendment No. 229 concerns life interests that are given to a spouse under an existing trust rather than under a will.
Amendments Nos. 295 and 296 concern the retrospective impact of schedule 20 on accumulation and maintenance trusts, which we have discussed. With the Committee’s permission, I shall not press them to a vote, because we have already voted twice on that matter. Amendments Nos. 298 and 299 seek to improve the transitional provisions for A and M trusts. That is a different point, and I shall take the Committee through it briefly. They seek to add a new section 49D, which would provide for an additional form of transitional serial interest.
As we have heard, transitional serial interests are those under trust that will continue to be governed by the old rules until that interest comes to an end. These two amendments would bring the treatment of existing A and Ms into line with the transitional provisions for life interest trusts. The rules governing life interest trusts are set out in new section 49C. That section provides that the case of somebody who becomes entitled to a life interest in an existing trust between Budget day and 6 April 2008 will fall within the transitional provisions, and the old rules will apply until his life interest terminates.
When considering these amendments, it makes sense to analyse how accumulation and maintenance trusts generally operate. They give the beneficiaries an unqualified right to the income from the trust when they reach 25. In effect, they turn into a life interest when the beneficiary reaches that age. It makes sense, therefore, to treat the creation of a life interest in that context in the same way as new section 49C treats the vesting of life interests in other trusts, that is to say that if it vests before 6 April 2008, it is governed by the old rules and it is a transitional serial interest. Applying the IIP rule to the context of an A and M trust, if the beneficiary turns 25 before 6 April 2008 his resulting life interest should be a transitional serial interest and therefore governed by the old rules. Just as new section 49C has that result in relation to IIPs, my amendments would provide that result in relation to A and Ms, which are identical in legal terms. Thus the amendment proposes to align the treatment of the two types of trust in relation to the transitional provisions.
Amendment No. 229 raises a different point. It concerns cases in which there is an existing life interest with a power to appoint a spouse to that interest and would provide that, where that appointment is made, the successive life interest should still be a transitional serial interest and fall within the old rules. A number of older family trusts contain successive life interests, and it would be unfair to penalise them long after they were set up. As we discussed extensively in relation to the general points on the spouse exemption, variation simply might not be possible—the terms of the trust might forbid it—and a court hearing would be expensive and might not succeed in achieving a variation. The effect of the amendment would be to ensure that where a life interest was appointed in the trust, it would operate in a similar way to the life interest taking effect as the result of a will, because it would operate on the death of a spouse. It would simply apply the same rule, which will now apply to will trusts, in the context of a pre-existing family trust.

Rob Marris: Amendment No. 229 refers to the spouse or civil partner. What does the hon. Lady mean by civil partner? Does she mean someone who is in a registered civil partnership or a civil partner in the other legal sense, such as under the Fatal Accidents Act 1976?

Theresa Villiers: I mean a civil partner within the meaning of section 103 of the Finance Act 2005, which gives civil partners the same tax status as spouses.

Rob Marris: Registered.

Theresa Villiers: I take the hon. Gentleman’s word for the term, but that was the section to which I was referring.
Like the classic situation of a will where the Government have chosen to save the spouse exemption, the life interest in this case is set up on death for a surviving spouse. For all the reasons why it would be unfair to penalise trusts set up by will, it would also be unfair to impose these new charges on a life interest which just happens to be set up in a trust. Just as in the will context, it will be harsh to force a spouse to sell her home to pay inheritance tax because the spouse exemption is lost.
These two situations are not qualitatively different. In both cases a life interest is being passed to a spouse. Just as the Treasury has relented in the will situation, I hope that we might see a similar change of heart in this situation which will have a significant practical impact on a number of pre-existing trusts, albeit they are of the type that would no longer be drafted these days. It is therefore a measure simply to deal with the older, more inflexible trusts and give them parallel treatment to that which the Government have chosen to provide to appointments to a life interest made under a will.

Dawn Primarolo: The Government have made special provision for trusts where the assets go to a bereaved minor. The Government have also provided a generous two-year transitional period in which A and M trusts can be modified to provide absolute entitlement at 18 where they do not already do so. As we have already debated at length, Government amendment No. 358 means that existing A and M trusts will receive the new treatment for aged 18 to25 trusts if they satisfy the relevant conditions from6 April 2008.
Amendments Nos. 298 and 299 are very technical and allow A and Ms to turn into qualifying IIP trusts during the transitional period. If the Government were to accept those amendments, which we will not, privileged treatment would continue where the trust does not pay out even at 25. The assets would continue to be held on trust, subject to the trustees’ powers into the indefinite future. That is exactly how A and Ms have been exploited for long-term tax avoidance, which schedule 20 is designed to stop. I have already set out for the Committee how rolling one type of trust into another in this way can put assets outside the IHT net for generations. I have absolutely no intention of repeating those points yet again.
The Opposition also propose changes to the transitional rules for interest in possession. As I have said, the Government have provided in schedule 20 a generous two-year transitional period for IIP trusts. We accept that some IIP trusts will have the wrong person in place on Budget day. If the beneficiary of such a trust is changed in transition that will not affect the trust entitlement to pre-Budget treatment from April 2008 onwards. Trustees are getting a once and for all opportunity to get the benefit to the right people. We are not trying to give existing trusts permanent rights to special treatment.
Because there is a two-year transitional period for people to decide whether any changes should be made to the person who held the IIP trust at Budget day, the trust can then go on receiving special treatment until the interest is charged after April 2008 or the trust is wound up. That provides a degree of grandfathering, which the Government think is reasonable. It gives people the opportunity to make changes should they not be happy with the beneficiary that was in place on Budget day and balances it with the need to counter the avoidance opportunities provided by an open-ended ability to switch beneficiaries without charge. It is not appropriate to go further; I shall therefore ask my hon. Friends to oppose the amendment if the hon. Member for Chipping Barnet decides to put it to the vote.

Theresa Villiers: I shall not put the amendment to a vote, although I continue to be concerned about the extent of the grandfathering provisions available under the measure. The two-year period to which the Paymaster General referred provides some assistance, but as has been discussed at length, it does not remove the retrospective effect of the Bill because in many instances it may not be possible to change the trust and even if it were, it is not possible for the settlor to go back and take the decision again as to which type of trusts are set up and which gifts to make.
I urge the Paymaster General to consider the possibility of making special provision for the one-off instance of an old-fashioned type of trust that provides provision for a successive life interest. The answer is not variation because the problem with the trusts is that they cannot be varied because they are old-fashioned in nature and do not have sufficient powers to enable them to be amended back into the framework set out in schedule 20.
I am grateful for the Paymaster General’s remarks and I am sorry that she is not minded to accept any of the amendments. However, I should be very grateful if she were prepared to reconsider the issues raised by amendment No. 229. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendments made: No. 386, in page 116, line 23[Vol II], at end insert
‘, or
(b) if, and to the extent that, section 49D below so provides.'.
No. 387, in page 116, line 37 [Vol II], at end insert—
‘49D Transitional serial interest: contracts of life insurance
(1) Where—
(a) a person (“C”) is beneficially entitled to an interest in possession in settled property (“the present interest”), and
(b) on C's becoming beneficially entitled to the present interest, the settled property consisted of, or included, rights under a contract of life insurance entered into before 22nd March 2006,
the present interest so far as subsisting in rights under the contract, or in property comprised in the settlement that directly or indirectly represents rights under the contract, is a “transitional serial interest” for the purposes of this Chapter if the following conditions are met.
(2) Condition 1 is that—
(a) the settlement commenced before 22nd March 2006, and
(b) immediately before 22nd March 2006—
(i) the property then comprised in the settlement consisted of, or included, rights under the contract, and
(ii) those rights were property in which C, or some other person, was beneficially entitled to an interest in possession (“the earlier interest”).
(3) Condition 2 is that—
(a) the earlier interest came to an end at a time on or after 6th April 2008 (“the earlier-interest end-time”) on the death of the person beneficially entitled to it and C became beneficially entitled to the present interest—
(i) at the earlier-interest end-time, or
(ii) on the coming to an end, on the death of the person beneficially entitled to it, of an interest in possession to which that person became beneficially entitled at the earlier-interest end-time, or
(iii) on the coming to an end of the second or last in an unbroken sequence of two or more consecutive interests in possession to the first of which a person became beneficially entitled at the earlier-interest end-time and each of which ended on the death of the person beneficially entitled to it, or
(b) C became beneficially entitled to the present interest—
(i) on the coming to an end, on the death of the person entitled to it, of an interest in possession that is a transitional serial interest under section 49C(1)(a), or
(ii) on the coming to an end of the second or last in an unbroken sequence of two or more consecutive interests in possession the first of which was a transitional serial interest under section 49C(1)(a) and each of which ended on the death of the person beneficially entitled to it.
(4) Condition 3 is that rights under the contract were comprised in the settlement throughout the period beginning with 22nd March 2006 and ending with C's becoming beneficially entitled to the present interest.
(5) Condition 4 is that—
(a) section 71A below does not apply to the property in which the present interest subsists, and
(b) the present interest is not a disabled person's interest.”.'.
No. 388, in page 116, line 41 [Vol II], leave out from beginning to ‘After' in line 4 on page 117 and insert—
‘6 (1) After section 89 (trusts for disabled persons) there is inserted—
“89A Self-settlement by person with condition expected to lead to disability
(1) This section applies to property transferred by a person (“A”) into settlement on or after 22nd March 2006 if—
(a) A was beneficially entitled to the property immediately before transferring it into settlement,
(b) A satisfies the Commissioners for Her Majesty's Revenue and Customs that, when the property was transferred into settlement, A had a condition that it was at that time reasonable to expect would have such effects on A as to lead to A becoming—
(i) a person falling within section 89(4)(a) above,
(ii) in receipt of an attendance allowance mentioned in section 89(4)(b) above, or
(iii) in receipt of a disability living allowance mentioned in section 89(4)(c) above by virtue of entitlement to the care component at the highest or middle rate, and
(c) the property is held on trusts—
(i) under which, during the life of A, no interest in possession in the settled property subsists, and
(ii) which secure that Conditions 1 and 2 are met.
(2) Condition 1 is that if any of the settled property is applied during A's life for the benefit of a beneficiary, it is applied for the benefit of A.
(3) Condition 2 is that any power to bring the trusts mentioned in subsection (1)(c) above to an end during A's life is such that, in the event of the power being exercised during A's life, either—
(a) A or another person will, on the trusts being brought to an end, be absolutely entitled to the settled property, or
(b) on the trusts being brought to an end, a disabled person's interest within section 89B(1)(a) or (c) will subsist in the settled property.
(4) If this section applies to settled property transferred into settlement by a person, the person shall be treated as beneficially entitled to an interest in possession in the settled property.
(5) For the purposes of subsection (1)(b)(ii) above, assume—
(a) that A will meet the conditions as to residence under section 64(1) of whichever of the 1992 Acts is applicable, and
(b) that there will be no provision made by regulations under section 67(1) and (2) of that Act.
(6) For the purposes of subsection (1)(b)(iii) above, assume—
(a) that A will meet the prescribed conditions as to residence under section 71(6) of whichever of the 1992 Acts is applicable, and
(b) that there will be no provision made by regulations under section 72(8) of that Act.
(7) For the purposes of subsection (3) above, ignore—
(a) power to give directions as to the settled property that is exercisable jointly by the persons who between them are entitled to the entire beneficial interest in the property, and
(b) anything that could occur as a result of exercise of any such power.
(8) In this section “the 1992 Acts” means—
the Social Security Contributions and Benefits Act 1992, and
the Social Security Contributions and Benefits (Northern Ireland) Act 1992.
89B Meaning of “disabled person's interest”
(1) In this Act “disabled person's interest” means—
(a) an interest in possession to which a person is under section 89(2) above treated as beneficially entitled,
(b) an interest in possession to which a person is under section 89A(4) above treated as beneficially entitled,
(c) an interest in possession in settled property (other than an interest within paragraph (a) or (b) above) to which a disabled person is beneficially entitled if the settled property was transferred into settlement on or after 22nd March 2006, or
(d) an interest in possession in settled property (other than an interest within paragraph (a) or (b) above) to which a person (“A”) is beneficially entitled if—
(i) A is the settlor,
(ii) A was beneficially entitled to the property immediately before transferring it into settlement,
(iii) A satisfies Her Majesty's Commissioners for Revenue and Customs as mentioned in section 89A(1)(b) above,
(iv) the settled property was transferred into settlement on or after 22nd March 2006, and
(v) the trusts on which the settled property is held secure that, if any of the settled property is applied during A's life for the benefit of a beneficiary, it is applied for the benefit of A.
(2) Subsections (4) to (6) of section 89 above (meaning of “disabled person” in subsection (1) of that section) have effect for the purposes of subsection (1)(c) above as they have effect for the purposes of subsection (1) of that section.
(3) Section 71D above does not apply to property in which there subsists a disabled person's interest within subsection (1)(c) above (but see also section 71D(5) above).”
(3) In section 89,'.
No. 389, in page 117, line 42 [Vol II], leave out ‘(2)' and insert ‘(1)'.—[Dawn Primarolo.]

Dawn Primarolo: I beg to move amendment No. 362, in page 118, line 33 [Vol II], at end insert
‘, or
(iii) a gift into a bereaved minor's trust on the coming to an end of a immediate post-death interest.'.

Edward O'Hara: With this it will be convenient to discuss the following amendments:
Government amendments Nos. 363 and 364.
Amendment No. 341, in page 119, line 2 [Vol II], at end insert—
‘(5A) In subsection (7) (application of section 3A to an event on the happening of which tax is chargeable under section 52 of the Inheritance Tax Act) after “in subsection (1)(a)” insert “or subsection (1A)(a).”.'.

Dawn Primarolo: Schedule 20 provides special provision for trusts set up in the will of a parent for a bereaved child where the beneficiary will take the assets absolutely at the age of 18. The trust’s assets are exempt from the periodic and exit charges that apply to other forms of trust.
Government amendments Nos. 362 and 363 provide that where an IIP trust comes to an end during the life of the person with the interest, and the trust assets become held on terms that meet the conditions for a trust of a bereaved minor, the transfer by the person with the ongoing interest will be potentially exempt, and completely exempt if they survive seven years. For example, that could apply when one spouse has created an IIP in their will—we have referred to this a number of times—for a surviving spouse with remainders to their child or children. For IIP trusts that were in existence before Budget day, the Government have provided in schedule 20 a generous two-year transitional period in which trustees can rearrange the interest in place on Budget day, if they so wish.
Government amendment No. 364 ensures that a transfer to further IIP trusts in that period will receive the potentially exempt treatment that it would have received before the Budget and be completely exempt if the person with the ongoing interest survives for seven or more years. Opposition amendment No. 341 seeks to achieve the same outcome—although the amendment is not quite in the right place—so I hope that Opposition Members will be pleased to support the Government amendments. I suggest therefore that amendment No. 341 is not necessary and I hope that the hon. Member for Chipping Barnet will not press it. I commend the Government amendments to the Committee.

Theresa Villiers: I welcome the Government’s amendment No. 364; to all intents and purposes it seems to be virtually identical to my amendment No. 341, except that it is in a different place, in which case I do not need to delay the Committee. I am delighted that we have an outbreak of consensus on the matter.

Amendment agreed to.

Amendments made: No. 390, in page 119, line 2 [Vol II], after ‘89' insert ‘or 89A'.
No. 363, in page 119, line 2 [Vol II], at end insert—
‘(3B) A transfer of value falls within subsection (1A)(c)(iii) above to the extent that the value transferred is attributable to settled property (whenever settled) that becomes property to which section 71A below applies in the following circumstances—
(a) under the settlement, a person (“L”) is beneficially entitled to an interest in possession in the settled property,
(b) the interest in possession is an immediate post-death interest,
(c) on or after 22nd March 2006, but during L's life, the interest in possession comes to an end,
(d) L is beneficially entitled to the interest in possession immediately before it comes to an end, and
(e) on the interest in possession coming to an end, the property—
(i) continues to be held on the trusts of the settlement, and
(ii) becomes property to which section 71A below applies.”.'.
No. 364, in page 119, line 2 [Vol II], at end insert—
‘( ) In subsection (7) (application of section in relation to charge to tax under section 52), after “subsection (1)(a)” insert “or (1A)(a)”.'.
No. 365, in page 119, line 11 [Vol II], after ‘71A' insert ‘or 71D'.
No. 366, in page 119, line 18 [Vol II], after ‘71A' insert ‘or 71D'.
No. 391, in page 119, line 26 [Vol II], at end insert—

‘Life assurance policies entered into before 22nd March 2006

10A (1) After section 46 insert—
“46A Contract of life insurance entered into before 22nd March 2006 which on that day is settled property in which interest in possession subsists
(1) Subsections (2) and (4) below apply where—
(a) a settlement commenced before 22nd March 2006,
(b) a contract of life insurance was entered into before that day,
(c) a premium payable under the contract is paid, or an allowed variation is made to the contract, at a particular time on or after that day,
(d) immediately before that day, and at all subsequent times up to the particular time, there were rights under the contract that—
(i) were comprised in the settlement, and
(ii) were settled property in which a transitionally-protected interest (whether or not the same such interest throughout that period) subsisted,
(e) rights under the contract become, by reference to payment of the premium or as a result of the variation,—
(i) comprised in the settlement, and
(ii) part of the settled property in which the then-current transitionally-protected interest subsists, and
(f) any variation of the contract on or after 22nd March 2006 but before the particular time, so far as it is a variation that—
(i) increased the benefits secured by the contract, or
(ii) extended the term of the insurance provided by the contract,
was an allowed variation.
(2) For the purposes of the provisions mentioned in subsection (3) below—
(a) the rights mentioned in subsection (1)(e) above shall be taken to have become comprised in the settlement, and
(b) the person beneficially entitled to the then-current transitionally-protected interest shall be taken to have become beneficially entitled to his interest in possession so far as it subsists in those rights,
before 22nd March 2006.
(3) Those provisions are—
section 3A(2) above;
section 5(1A) above;
section 49(1A) and (1B) below;
section 51(1A) and (1B) below;
section 52(2A) and (3A) below;
section 53(1A) and (2A) below;
section 54(2A) and (2B) below;
section 54A(1A) below;
section 57A(1A) below;
section 58(1B) and (1C) below;
section 59(1) and (2) below;
section 80(4) below;
section 100(1A) below;
section 101(1A) below;
section 102ZA(1) of the Finance Act 1986 (gifts with reservation); and
sections 72(1A) and (2A) and 73(2A) of the 1992 Act.
(4) If payment of the premium is a transfer of value made by an individual, that transfer of value is a potentially exempt transfer.
(5) In this section—
“allowed variation”, in relation to a contract, means a variation that takes place by operation of, or as a result of exercise of rights conferred by, provisions forming part of the contract immediately before 22nd March 2006;
“transitionally-protected interest” means—
(a) an interest in possession to which a person was beneficially entitled immediately before, and on, 22nd March 2006, or
(b) a transitional serial interest.
46B Contract of life insurance entered into before 22nd March 2006 which immediately before that day is property to which section 71 applies
(1) Subsections (2) and (5) below apply where—
(a) a settlement commenced before 22nd March 2006,
(b) a contract of life insurance was entered into before that day,
(c) a premium payable under the contract is paid, or an allowed variation is made to the contract, at a particular time on or after that day,
(d) immediately before that day, and at all subsequent times up to the particular time, there were rights under the contract that—
(i) were comprised in the settlement, and
(ii) were settled property to which section 71 below applied,
(e) rights under the contract become, by reference to payment of the premium or as a result of the variation, comprised in the settlement, and
(f) any variation of the contract on or after 22nd March 2006 but before the particular time, so far as it was a variation that—
(i) increased the benefits secured by the contract, or
(ii) extended the term of the insurance provided by the contract,
was an allowed variation.
(2) If the rights mentioned in subsection (1)(e) above would, but for subsection (1A) of section 71 below, become property to which that section applies, those rights shall become settled property to which that section applies when they become comprised in the settlement.
(3) Subsection (5) below also applies where—
(a) a settlement commenced before 22nd March 2006,
(b) a contract of life insurance was entered into before that day,
(c) a premium payable under the contract is paid, or an allowed variation is made to the contract, at a particular time on or after that day when there are rights under the contract—
(i) that are comprised in the settlement and are settled property to which section 71A or 71D below applies,
(ii) that immediately before that day were settled property to which section 71 below applied, and
(iii) that on or after that day, but before the particular time, became property to which section 71A or 71D below applies in circumstances falling within subsection (4) below,
(d) rights under the contract become, by reference to payment of the premium or as a result of the variation, comprised in the settlement, and
(e) any variation of the contract on or after 22nd March 2006 but before the particular time, so far as it was a variation that—
(i) increased the benefits secured by the contract, or
(ii) extended the term of the insurance provided by the contract,
was an allowed variation.
(4) The circumstances referred to in subsection (3)(c)(iii) above are—
(a) in the case of property to which section 71D below applies, that the property on becoming property to which section 71D below applies ceased to be property to which section 71 below applied without ceasing to be settled property;
(b) in the case of property to which section 71A below applies—
(i) that the property on becoming property to which section 71A below applies ceased, by the operation of section 71(1B) below, to be property to which section 71 below applied, or
(ii) that the property, having become property to which section 71D below applied in circumstances falling within paragraph (a) above, on becoming property to which 71A below applies ceased, by the operation of section 71D(5)(a) below, to be property to which section 71D below applied.
(5) If payment of the premium is a transfer of value made by an individual, that transfer of value is a potentially exempt transfer.
(6) In this section “allowed variation”, in relation to a contract, means a variation that takes place by operation of, or as a result of exercise of rights conferred by, provisions forming part of the contract immediately before 22nd March 2006.”
(2) Sub-paragraph (1) shall be deemed to have come into force on 22nd March 2006.'.
No. 367, in page 119, line 39 [Vol II], after ‘71A' insert ‘or 71D'.
No. 368, in page 119, line 41 [Vol II], leave out paragraph 12.
No. 369, in page 120, line 42 [Vol II], after ‘71A' insert ‘or 71D'.
No. 370, in page 121, line 7 [Vol II], leave out sub-paragraph (4).
No. 371, in page 122, line 27 [Vol II], after ‘71A,' insert ‘71D,'.—[Dawn Primarolo.]

Amendment proposed: No. 379, in page 122, line 34[Vol II], at end insert—
‘(2A) After sub-paragraph 1(f) insert—
“(g) property in the form of a life protection policy;
(h) proceeds from a life protection policy, within two years after any death giving rise to benefits under the policy.”.'.—[Mrs. Villiers.]

Question put, That the amendment be made:—

The Committee divided: Ayes 12, Noes 17.

Question accordingly negatived.

Amendment made: No. 372, in page 124, line 28[Vol II], after ‘71A,' insert ‘71D,'.—[Dawn Primarolo.]

Theresa Villiers: I beg to move amendment No. 269, page 124 [Vol II], leave out lines 31 to 33 and insert—
‘23 Section 80(3) of IHTA 1984 shall be replaced with the following provision—
“(3) This section shall not apply if the occasion first referred to in subsection (1) above occurred before 27th March 1974 or (unless that occasion was the coming into existence of an immediate post-death interest) on, or after, 22nd March 2006.”.'.

Edward O'Hara: With this it will be convenient to discuss Government amendment No. 373

Theresa Villiers: In calculating entry and exit charges for trusts subject to the relevant property regime, it is necessary to aggregate the value of the trust and any related settlement. A related settlement is one made by the same settlor that commenced on the same day. Under the pre-Budget rules, a settlement in which the settlor or the settlor’s spouse had an interest in possession at the outset was disregarded for those purposes until the interest of the settlor or the spouse came to an end.
Under a standard form will for married couples, the nil rate band passes on a discretionary trust to the surviving spouse and the children, and the residue of the estate is held on a life interest trust for the surviving spouse. Section 80 of the Inheritance Tax Act 1984 disregarded the life interest trust in the residuary estate in such situations and did not treat it as a related settlement.
Because the residuary life interest trust was disregarded as a result of the operation of section 80, the nil rate band trust would suffer only 10-yearly entry and exit charges if its value at that point exceeded the nil rate band. The value of the residuary estate did not taint the nil rate band trust. That greatly simplified the calculation of charges and presumably made things simpler for the Revenue. Without the protection of section 80, complex calculations would need to be performed every time a distribution was made from the nil rate band trust. The tax payable might have been small, but the professional fees resulting from the time spent on calculation could be considerable.
The changes proposed in paragraph 23 will disapply the benefits of the section 80 exemption to all settlements, even ones that fall within the definition of “immediate post-death interests”. The overall effect of amendment No. 269 would be to carry forward into the new regime a benefit for IPDI-compliant trusts that was previously available to all life interest trusts set up for the settlor or the settlor’s spouse. I am delighted to see that the Government seem to have followed a similar line in addressing the problem and that Government amendment No. 373 has the same goal as my own. I await the Paymaster General’s explanation of her amendment. Either her amendment or mine would be sufficient to deal with the problem.

Dawn Primarolo: Government amendment No. 373 will preserve that treatment where the trust for the surviving spouse or civil partner meets the condition of creating an immediate post-death interest. Although the Opposition amendment is designed to do the same thing, I prefer the Government’s drafting, which neatly preserves the treatment. I commend the amendment to the Committee, and I hope that the hon. Lady will withdraw hers.

Theresa Villiers: I am delighted to beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment made: No. 373, page 124, line 31 [Vol II], leave out from ‘section' to end of line 33 and insert
‘80 of IHTA 1984 (postponement of commencement date of settlement where settlor, or spouse or civil partner or surviving spouse or surviving civil partner, has interest in possession at outset), after subsection (3) insert—
“(4) Where the occasion first referred to in subsection (1) above occurs on or after 22nd March 2006, this section applies only if the interest in possession first referred to in that subsection is an immediate post-death interest.”.'.—[Dawn Primarolo.]

Dawn Primarolo: I beg to move Government amendment No. 398, page 126, line 19 [Vol II], leave out ‘In'.

Edward O'Hara: With this it will be convenientto consider the following: Government amendmentNo. 399.
Amendment No. 340, page 126 [Vol II], leave out lines 21 to 25 and insert—
‘(1A) Where the testator dies on or after 22nd March 2006, subsection (1) above shall have effect as if—
(a) the reference to any interest in possession were a reference to any interest in possession that is—
(i) an immediate post-death interest, or
(ii) a disabled person's interest;
(b) an event which results in settled property to which subsection (1) above (as modified by the preceding subsection) being held on trusts which either:
(i) would constitute a trust for bereaved minors but for the requirement that such a trust must be established under the will of a deceased parent of a bereaved minor; or
(ii) would confer on any person an immediate post-death interest but for the condition in section 49A(3) that the person in question became beneficially entitled to the interest in possession on the death of the testator and the condition in section 49A(7) in so far as it relates to the condition in section 49A(3)
were (for the purposes of this section only) an event on which tax would be chargeable under a provision of Chapter 3 Part 3 of this Act.'.
Government amendment No. 400.

Dawn Primarolo: I shall be brief. A long-standing arrangement allows wills to be amended after a person’s death as if the amendments had been provided for in the will. That includes appointments made out of trusts created via wills. Technical changes to the Bill are required to ensure that the arrangements continue to function as intended.
Amendment No. 340 is also relevant, but I hope that the Opposition will allow Government amendments Nos. 398 to 400 to prevail, as they will ensure that the backdated treatment will be available for appointments or terms that would qualify if they had been established by the testator’s will as an immediate post-death interest, a trust for bereaved minors or a new 18-to-25 trust introduced by Government amendment No. 358. I hope that the Opposition will not press their amendment to a vote. I commend the Government amendments to the Committee.

Theresa Villiers: My amendments have the same goal as the Government amendments, so the outbreak of consensus continues briefly. It is ironic that the Government’s initial reaction to the concerns expressed by the Opposition about the retrospective impact of schedule 20 and the problems it would cause was to say that people could simply vary the arrangements that they have made under their wills to amend them back into the new framework. Yet the mechanism that they provided for doing that was defective, as the Paymaster General has acknowledged in relation to section 144, which is an enormously important provision used to make flexible appointments under a will.
I shall not go over what the amendments are designed to achieve, because the Paymaster General has already outlined them. I have to acknowledge, though, that there is a defect in both my amendment and hers. Both our amendments refer to people who have died after 22 March 2006. However, the reality is that this is a problem in respect of people who died in the previous two years, because the way in which the discretionary wills operates is essentially as follows: the property is left on trusts that are discretionary and accompanied by a letter of wishes and the trust must then have two years under section 144 to make the relevant appointments that are suitable to the family’s circumstances at the time and match the letter of wishes. Hence trustees under such wills might not yet have made an appointment prior to 22 March 2006.
I am happy not to press my amendment, but perhaps the Paymaster General might be minded on Report to look at possibly deleting the reference to deaths after 22 March, so that we could ensure that the welcome relief provided for deaths after that point could also apply to deaths occurring in the previous two years, where the same problem occurs. On that basis, I will not press my amendments.

Dawn Primarolo: The hon. Lady and I had a brief conversation about this point before this afternoon’s sitting, which covered her starred amendments. I am prepared to put on the record that I will consider what she has said. I am not guaranteeing that I will return with an amendment on Report, but I will consider the matter, just to be certain, because of the points that she is making. I undertake to inform her in good time if I do not consider that an amendment is necessary, because she, too, may want to reflect on the matter before Report. I am prepared to give an undertaking on that basis, and I hope that I am able to give her a fuller answer in good time before Report.

Theresa Villiers: I am grateful for that assurance and for the assurance on timing. I am aware that a number of cases may have to go to court, depending on the approach taken on this matter. I look forward to hearing further from the Paymaster General.

Amendment agreed to.

Amendments made: No. 399, page 126, line 19 [Vol II], at end insert
‘is amended as follows.
(2) In subsection (1)—
(a) for “This section applies” substitute “Subsection (2) below applies”, and
(b) in paragraph (a), for “(apart from this section)” substitute “(apart from subsection (2) below)”.'.
No. 400, page 126, line 25 [Vol II], at end insert—
‘(4) In subsection (2), for “this section” (in both places) substitute “this subsection”.
(5) After subsection (2) insert—
“(3) Subsection (4) below applies where—
(a) a person dies on or after 22nd March 2006,
(b) property comprised in the person's estate immediately before his death is settled by his will, and
(c) within the period of two years after his death, but before an immediate post-death interest or a disabled person's interest has subsisted in the property, there occurs an event that involves causing property comprised in the testator's estate to be held on trusts that would, if they had in fact been established by the testator's will, have resulted in—
(i) an immediate post-death interest subsisting in the property, or
(ii) section 71A or 71D above applying to the property.
(4) Where this subsection applies by virtue of an event—
(a) this Act shall have effect as if the will had provided that on the testator's death the property should be held as it is held after the event, but
(b) tax shall not be charged on that event under any provision of Chapter 3 of Part 3 of this Act.”.'.
No. 392, page 126, line 30 [Vol II], leave out ‘89(2A)' and insert ‘89B'.
No. 401, page 129, line 20 [Vol II], at end insert—

‘PART 6

CONDITIONAL EXEMPTION: RELIEF FROM CHARGES
(1) Section 79 of IHTA 1984 (subsection (3) of which provides for charges to tax where, in the case of settled property designated under section 31 on a claim under section 79, an event occurs that would be chargeable under section 32 or 32A if the claim had been under section 30) is amended as follows.
(2) After subsection (5) (amount on which tax charged under subsection (3)) insert—
“(5A) Where the event giving rise to a charge to tax under subsection (3) above is a disposal on sale, and the sale—
(a) was not intended to confer any gratuitous benefit on any person, and
(b) was either a transaction at arm's length between persons not connected with each other or a transaction such as might be expected to be made at arm's length between persons not connected with each other,
the value of the property at the time of that event shall be taken for the purposes of subsection (5) above to be equal to the proceeds of the sale.”
(3) For subsection (7) (which provides that the “relevant period” mentioned in subsection (6) begins with the latest of certain listed days and ends with the day before the event giving rise to the charge under subsection (3)) substitute—
“(7) In subsection (6) above “the relevant period” means the period given by subsection (7A) below or, if shorter, the period given by subsection (7B) below.
(7A) The period given by this subsection is the period beginning with the latest of—
(a) the day on which the settlement commenced,
(b) the date of the last ten-year anniversary of the settlement to fall before the day on which the property became comprised in the settlement,
(c) the date of the last ten-year anniversary of the settlement to fall before the day on which the property was designated under section 31 above on a claim under this section, and
(d) 13th March 1975,
and ending with the day before the event giving rise to the charge.
(7B) The period given by this subsection is the period equal in length to the number of relevant-property days in the period—
(a) beginning with the day that is the latest of those referred to in paragraphs (a) to (d) of subsection (7A) above, and
(b) ending with the day before the event giving rise to the charge.
(7C) For the purposes of subsection (7B) above, a day is a “relevant-property day” if at any time on that day the property was relevant property.”
(4) After subsection (9) insert—
“(9A) Subsection (9B) below applies where the same event gives rise—
(a) to a charge under subsection (3) above in relation to any property, and
(b) to a charge under section 32 or 32A above in relation to that property.
(9B) If the amount of each of the charges is the same, each charge shall have effect as a charge for one half of the amount that would be charged apart from this subsection; otherwise, whichever of the charges is lower in amount shall have effect as if it were a charge the amount of which is nil.”.'.—[Dawn Primarolo.]

Question proposed, That this schedule, as amended, be the Twentieth schedule to the Bill.

Theresa Villiers: I promise that I will be brief, because I want this to be over much more than anyone else in the Committee.
I shall close by referring to what the experts said right at the beginning—that schedule 20 as then drafted would have amounted to a tax on prudent families. It would have affected millions of ordinary families, not only the super-rich as the Government have asserted. A number of problems have been mitigated by the amendments accepted this afternoon, but severe problems remain. The Government’s approach has been coloured by a combination of prejudice, mistrust and misunderstanding of what trusts do and how they are used.
The trust concept has rightly been described as an act of genius by the English court system and culture. Since the middle ages, when petitioners first asked the Lord Chancellor for special help when the inflexibility of the common law produced injustice, since Coke and Ellesmere in the courts of equity and common law battled it out for supremacy in the 16th century and ever since the great law reformers cleared away the cobwebs in the chancery division with the historic 1925 reforms, the English court system has permitted the owners of property to divide it between different people using a trust. The schedule as originally drafted would have placed a number of penal charges on ordinary family arrangements that have nothing to do with the avoidance of tax and everything to do with the wish to provide responsibly and prudently for a family’s future.
The Paymaster General has continued to fail to respond to the direct requests of the Treasury Select Committee that the Government provide
“detailed information about how it has arrived at its estimate that the new rules on the tax treatment of certain trusts will affect only ‘a minority of a minority’ of the 100,000 discretionary trusts”
that they were aware of. She has continued to make assertions about the use of trusts for tax avoidance purposes but has provided no evidence other than a couple of theoretical examples and, as I recall, a reference to the Daily Mail in Committee of the whole House. The hon. Member for Wolverhampton, South-West weighed in with the weighty authority of the Channel 4 website. We still do not have hard evidence of what avoidance schedule 20 is designed to hit.
The process has been a back-of-an-envelope job. The proposals were flawed at the start and as a result the Government have had to table highly complex and difficult-to-understand amendments. Complexity has been piled on complexity, and the Chancellor failed to mention even the most controversial changes in his Budget speech. Anxiety has been inflicted on thousands of people not by scare stories from the Opposition and professional groups but by the uncertainty of the provisions in the schedule. The anxiety was a result of the fact that the Government did not consult on their proposals or think them through properly. Frankly, they got them wrong.
I urge the Committee to think closely about the remaining problems on divorce, the vulnerable, self-settlement and insurance, and I hope that we will return to many of those issues on Report. The problems with the schedule are far from being resolved, and the Opposition will continue to press the issue until we see a rational, comprehensive and fair method for the taxation of trusts.

Rob Marris: What a long schedule, and I think that we got through the technical parts. I congratulate the Paymaster General on listening to Members and for clarifying matters even when they did not need it. However, it is politically revealing when we have such a technical debate, as it shows the divisions between the two main parties in the House. That is demonstrated when we discuss matters such as trusts and inheritance tax, or when the hon. Member for Chipping Barnet will not define what she regards as middle income, but nevertheless lets slip that she considers modest income to be about £25,000 a year. That is above the average level of earnings in this country; it is probably above average earnings in my constituency.
The flavour of the hon. Lady’s remarks and of her proposed amendments, though not the totality, has in many cases been to protect the rich. The rich should of course be treated fairly under tax. However, when we get down to it, what is regarded as fair tax in society, and the extent to which we allow people legally to avoid tax, are political matters.
The Bill and the schedule have attempted to narrow the ways out for people. However, technical amendments and discussions about protecting the vulnerable appear to be designed to protect individuals such as the Marquess of Bristol—I do not know whether he is, or was, a constituent of the Paymaster General. Vulnerable people need protecting and those who have a disability are protected under schedule 20 and the other legislation. However, when the official Opposition champion vulnerable people who are drug addicts with £40 million a year, I believe that that clearly reveals the class nature of their approach, as well as who is standing up for the rich and who is standing up for average working people.

Julia Goldsworthy: The hon. Member for Wolverhampton, South-West has sought to characterise the situation as one in which there is one party supporting the poor and another supporting the rich. My party’s point of view is that, as the Bill stood before amendment, the schedule would have affected huge numbers of people. However, a series of Government amendments have clarified the position and have limited the number of affected people. It is regrettable that the amendments were not incorporated into the main text of the Bill as published. The process was evidently rushed.

Dawn Primarolo: Perhaps the hon. Lady would like to explain who would pay the capital gains tax from which she expects to obtain £14 billion.

Julia Goldsworthy: I am sure, Mr. O’ Hara, that you would like me to stay in order.

Edward O'Hara: Please stay in order.

Julia Goldsworthy: To stay in order then, the fundamental problem with the Bill, as it stood before amendment, was the matter of spouse exemptions. Had the schedule gone forward unamended, there would have been a great deal of concern that it would have impacted on a large number of wills and on many people. On that basis, we will not be opposing the schedule. However, it needs considerable improvement and the rough edges will continue to need smoothing out over many years. We will continue to keep a close eye on matters.

Edward O'Hara: Order. Before we dispose of the schedule, I notice that Private Eye is being widely read in the Committee. Given the last two contributions, I do not rule out that Private Eye may be following the debate closely. However, if it is not, it should not be appropriate reading in the Committee.

Question put, That this schedule, as amended, be the Twentieth schedule to the Bill:—

The Committee divided: Ayes 18, Noes 7.

Question accordingly agreed to.

Schedule 20, as amended, agreed to.

Edward O'Hara: I stand corrected. It was not Private Eye, but Tribune that was being widely read.

Clause 158 ordered to stand part of the Bill.

Clause 159 ordered to stand part of the Bill.

Schedule 21

Taxable property held by investment-regulated pension schemes

Mark Hoban: I beg to move amendment No. 120, page 140, line 25 [Vol II], leave out from beginning to end of line 24 on page 142.

Edward O'Hara: With this it will be convenient to discuss amendment
No. 121, page 141, line 12 [Vol II], leave out ‘50' insert ‘10'.

Mark Hoban: May I say at this late stage of the day what a pleasure it is to serve under your chairmanship, Mr. O’Hara.
Let us be under no illusion about schedule 21. It represents a climbdown by the Government. It is the reversal of a policy that was defended doughtily through the 2004 and 2005 Finance Bills by the Economic Secretary’s predecessor but one; the policy was defended until the eleventh hour, December last year, when the pre-Budget report announced the climbdown that self-invested personal pensions would no longer be able to invest in, among other things, residential property.
Some might say that the debate about residential property came as a surprise to the Government; they were not aware that people might wish to put residential property in their SIPPs. However, if we go back to the Committee stage of the 2004 Finance Bill, we find my hon. Friend the Member for Tatton (Mr. Osborne) highlighting the risk that would be posed by relaxing the rules on pension scheme investments. He said very presciently that
“the clause opens up the possibility of the pension penthouse, the pension Porsche and the pension Picasso, and that is something that people might exploit”—[Official Report, Standing Committee A, 15 June 2004; c. 531.]

Julia Goldsworthy: Does the hon. Gentleman accept that my hon. Friend the Member for Eastleigh (Chris Huhne) was a partner in crime in raising the issue with the Government? I believe that we are not allowed to refer to my hon. Friend’s amendment.

Mark Hoban: The hon. Lady will remember that she and the hon. Member for Eastleigh arrived in this House at the same time. My maths being what it is, I think that 2005 comes after 2004.

Mark Tami: Not with the Liberals.

Mark Hoban: I shall ignore the sedentary remarks about the accuracy of Liberals’ counting. We have had too many comments about that already and I am sure that I would be ruled out of order if I dwelt too much on how the sums cannot add up. It was not the hon. Member for Eastleigh who opposed this, as he was not, and nor was the hon. Lady, in the House at the time.

Julia Goldsworthy: I apologise, but my hon. Friend tabled amendments to last year’s Finance Bill raising concerns about self-investment personal pensions and was very vociferous on this issue.

Mark Hoban: I was not a member of the Standing Committee on last year’s Finance Bill, but the Economic Secretary was, as he has reminded the Committee from time to time over the last few weeks. He might remember more of those proceedings than anyone else. Even if the hon. Member for Eastleigh raised these issues in the proceedings on the 2005 Bill, it was my hon. Friend the Member for Tatton who talked about it first.

Rob Marris: Get on with it.

Mark Hoban: The hon. Gentleman tells me to get on with it but I think that it is important to set out the background to the changes in this schedule. They are quite significant changes. They reflect a reversal of Government policy and it is important to understand their impact.
The then Economic Secretary to the Treasury, the current Secretary of State for Communities and Local Government, the right hon. Member for Bolton, West (Ruth Kelly) said:
“The new regime will provide a much freer choice for tax-favoured pension schemes over what sort of investment they make. We believe that schemes should as far as possible be left to decide, in light of market developments, their own investment strategy and choice of investment assets.”—[Official Report, Standing Committee A, 8 June 2004; c. 463.]
At that stage the Government were right behind the proposals that they are seeking to reverse in Committee today. She also said:
“That will give schemes the same opportunity to take advantage of potential growth in a wider range of assets.”
She added, which I find quite remarkable, given the cause of the Government’s U-turn:
“I do not accept that suddenly to start investing in the housing market will prove a particularly attractive option”.—[Official Report, Standing Committee A, 15 June 2004; c. 533.]
The concerns of people in venture schemes investing in the housing market forced the Government to make their U-turn in the pre-Budget report.
The quite lengthy schedule that is in front of us today—it is more than 40 pages—replaces some very straightforward regulations. The regulations that drove what SIPPs could invest in prior to A-day were set out in the Retirement Benefits Schemes (Restriction on Discretion to Approve) (Small Self-Administered Schemes) Regulations 1991. Paragraph (5) specified that schemes could not hold directly or indirectly as investment, personal chattels, other than choses in action, or, in Scotland, moveable property other than incorporeal moveable property and residential property other than that specified in paragraph (2). It went on to talk about shares in listed companies. Those were quite straightforward rules and regulations that people seemed to understand and they seemed to work quite well.
To ensure that the people advising on those schemes were fully aware of the type of property that was incorporated in those descriptions, Inland Revenue document IM8006 defined them more closely. It set out clearly what could and could not be invested in by SIPPs. It stated:
“Choses in action are permitted investments and include: Company shares, copyrights, deposit accounts, financial futures, commodity futures and traded options. The following assets are personal chattels and not choses in action and are therefore prohibited investments: antiques, gem stones, works of art”—
the pension Picasso—
“oriental rugs, rare books, furniture, rare stamps, gold bullion, fine wines, jewellery, vintage cars”—
the pensions Porsche that my hon. Friend the Member for Tatton referred to—
“gold bullion, yachts and krugerands.”
The rules were clear and advisers understood them, but they were swept away in the Finance Act 2004 and opportunities were created for SIPPs to invest in assets that had previously been prohibited.
Despite the warnings that were given, the Government pursued that course. As I said earlier, they defended the practice of widening the range of assets that could be invested until they got to the pre-Budget report last December. They waited just four months before A-day to announce their climbdown.

Edward Balls: On the hon. Gentleman’s point about the previous regime, do I take it that he is saying that it was better, and that we should return to the definitions in that previous regime?

Mark Hoban: We will have the opportunity today and perhaps on Tuesday morning to explore what the Government want to achieve by changing to the current regime. I may be more able to answer the hon. Gentleman’s question when I have had a fuller explanation from him about what the Government are seeking to do. It is interesting that what were relatively straightforward rules a few years ago now are 42-pages long. They include a regime of penalties, complicated rules on property and, to show their breadth, include the second-ever mention of “beach hut” in primary legislation.
My amendments answer the Economic Secretary’s intervention; they are probing amendments designed to discover what the Government want to achieve in introducing such complex regulations. If I may, Mr. O’Hara, when we have debated the amendments, I would like to raise other issues in the stand part debate.
The thrust of the schedule to which amendments Nos. 120 and 121 relate is to restrict the investments that SIPPs can make, but part 1 of what will become new schedule 29A provides that there may be other pension schemes that fall outside the definition of SIPPs where these rules will also apply. Part 1 will bring within the scope of the prohibitions on investment certain schemes that are not SIPPs. In paragraph 2 of new schedule 20A, there are rules that will bring occupational pension schemes that meet certain criteria within the rules—for example, small occupational pension schemes.
Given that occupational pension schemes can, in principle, invest in residential property, a point that the then Economic Secretary made in 2004, can the current Economic Secretary explain why he believes the other schemes should be incorporated as part of the regime that goes beyond the SIPPs, which is the initial cause of concern, to a wider range of schemes?
Amendment No. 121 refers to the rule relating to occupational pension schemes, which may well fall within the rule if
“there are 50 or fewer members of the pension scheme.”
Why 50? The amendment proposes that it should be 10, but it is designed to probe the Government’s thinking on the matter. A different amendment could have raised that threshold to 100 or 200. The amendment seeks to identify the type of schemes the Government are trying to capture in the proposal.
Let us consider the Government actuary’s figures about the number of open occupational pension schemes. There are now more than 54,000 of them, 47,000 of which have 11 or fewer members. Just under 4,000 schemes have between 12 and 99 members and larger schemes have between 100 and 999 members. The bulk of the smaller occupational pensions would be caught by my amendment.
It may be that, when it comes to occupational pension schemes, size does not matter. What might matter is the influence that members have over the disposition of assets under the scheme, which I can understand. If that were so, why do the Government set limits on the number of members that can have influence in those schemes and determine whether they fall inside or outside the provisions of schedule 21? The schedule states that
“at least 10 per cent. of the members of the pension scheme meet that condition”
whereby they can
“direct, influence or advise on the manner of investment of any of the sums and assets held for the purpose of the pension scheme.”
If the Government are concerned about the ability of members of the pension scheme to direct how those investments are dealt with, why say that, when fewer than 10 per cent. of members have that power, the scheme does not fall within the rules?
Some complicated interactions are trying to establish the types of scheme that may not fall within the ambit of the scope of schedule 21. It would be helpful to understand from the Economic Secretary the thinking that lies behind such provisions. I thought that, in principle, if we were worried about the ability of members to influence a scheme, the fact that one member could influence it is perhaps sufficient to bring it within the scope of the schedule. I seek clarification from him, first, about why schemes such as occupational pension schemes have been brought into the Bill and, secondly, why the Government have set the number of members at 50 or fewer rather than at any other level and require interaction with the ability of other members to influence the scheme.

Edward Balls: I join the hon. Member for Fareham in welcoming you to the Committee this afternoon, Mr. O’Hara. We need to make progress, given that there are pressing engagements ahead. I am grateful to the hon. Gentleman for making clear that he was introducing probing amendments. Taken at face value, they are odd amendments and I would have been surprised if he were intending to press them to a Division for reasons that I shall explain.
The context of the schedule is the whole reform to personal pensions that was put in place under the Finance Act 2004 and which came into effect on 6 April—A day. The reforms were designed to simplify substantially the taxation of pensions to provide benefits for all taxpayers by improving choice and flexibility for providers and to give greater encouragement for individuals to save for retirement. Many supportive statements have been made about the A-day regime from throughout the industry. Mr. Tom McPhail from Hargreaves Lansdown said that A-day
“will make it much easier for people to engage with pensions...Too much of the time we have to tell people what they can’t do, in future people will be free to do far more with pensions.”
That is the result of all the different reforms that are being introduced.
We are covering a small aspect of the wider pension reform, which, as the hon. Gentleman said, was debated when we discussed last year’s Finance Bill and then during the following months on the Floor of the House. Earlier in the Committee, I spoke at length about the contributions from the hon. Member for Eastleigh on those matters. Tempting as it is, I shall not return to the events of last summer, but that is an issue that he and others raised.
This is a consultative and listening Government. My predecessor was not only robust in debate, but a listening Economic Secretary. He looked in detail at those matters and concluded that potential risks to the taxpayer were involved in that aspect of the regime. Those risks could potentially run into hundreds of millions of pounds, not least because of the possibility that people might choose for tax purposes suddenly to find ways in which they could use their pension fund, and therefore tax advantages, to invest in, for example, beach huts. The hon. Member for Fareham raised that issue earlier.
As fascinating as all that might be for the Committee—it is potentially a diversion though—I shall be brief. I looked into the issue of beach huts to see the kind of prices they go for. This year, in Mudeford, which after investigation I confirmed is in Dorset, a beach hut was sold for £165,000. There are 354 beach huts in Mudeford, so one can imagine that if people chose to go down the route of using their pension fund to buy their beach hut, there could be an expensive cost to the Exchequer, simply for residents of Mudeford.
For that and wider reasons, the Government have taken the view that to allow tax-advantage, beach-hut buying would be the wrong road to go down. That was one of the many and broader points put to the Government during the consultations, to which the Economic Secretary listened carefully.

Mark Francois: Are they subject to capital gains tax?

Edward Balls: It all depends on whether it is one’s primary residence.

Rob Marris: A beach hut cannot be lived in. That is what a beach hut is—a person is not allowed to live in one so it cannot be one’s primary residence, and therefore it is eligible for capital gains tax.

Edward Balls: As on many matters during the course of deliberations on the Finance Bill, I bow to the superior knowledge of my hon. Friend, including on the issue of beach huts. However, I would say that if one was to fork out £165,000 on a beach hut, one might be tempted to make sure that one got value for money. [Interruption.] After the £14 billion that the Liberal Democrats would swipe from the rich via capital gains and other capital taxes, I guess that one might see the price of beach huts drop in Mudeford and elsewhere—only time will tell. People might be interested to know that it will still be possible to invest in a monastery for those purposes, but not a beach hut, for arcane reasons that might need to be probed later—we will not go into that now.
Suffice to say that the issue was looked at in detail, and in order to protect the revenue and ensure that the more general benefits of flexibility and openness that are behind the wider pension reforms which came into effect on A day, the then Economic Secretary announced that it was necessary to act, and the Chancellor made an announcement at the time of the pre-Budget report. The schedule makes it clear that we are not seeking to allow tax revenues to support, through pension funds, investments for individual and personal use. Pension funds should be used to make provision for an income flow in retirement. The schedule does that.
Amendment No. 120 seeks to delete from the new schedule the basic definition of an investment-regulated pension scheme. As hon. Members might be aware, the legislation seeks to apply tax charges to investment-regulated pension schemes invested in residential property and tangible, moveable assets. Investment-regulated pension schemes are those in which members can influence the way in which the schemes make investments. The purpose of the schedule is, by identifying those investments, to prevent generous tax reliefs from being abused in that way.
As I said, the amendment seeks to remove the definition from the schedule. In so doing, it would render the schedule moot and would leave us open to the kinds of tax avoidance risk that were identified during the consultation and which have caused the Government to act. That is why it would be wrong to accept the amendment.
The hon. Gentleman asked why we needed to come up with a new series of definitions. The reason is that this is part of a wider attempt to move the taxation of pensions into a more modern, more carefully defined environment in which, for example, we replace discussion of chattels with discussion of property. In order to give pension investors greater certainty, we should update definitions in other ways to be more state of the art, while shifting the wide range of HMRC discretionary powers to interpret previous legislation, in order to make it clearer in this schedule—and more widely in the pensions tax regime—how the framework will operate legislatively. We should move, in fact, from a piecemeal and rather fragmented approach to something that is more coherent and thought through. 
Amendment No. 120 would take us backwards. Neither HMRC nor the Treasury has had representations from any of the industry bodies or from representatives of the pensions industry to suggest that we have got the definitions wrong. By removing the definition of an investment-regulated pension scheme, the amendment would prevent tax charges from applying to any pension scheme. That would encourage the very abuse that hon. Members of all parties, including my hon. Friend the Member for Tooting, privately as well as publicly, pressed the Government on in recent months.
Amendment No. 121 is more serious in that it changes the numbers within the regime that we are trying to establish. I can understand why we chose the numbers that we did, but the number of 50 or 10 is a matter or judgment and I am happy to use the debate to explain the thinking behind it. The amendment targets a detailed part of the definition of an investment-regulated pension scheme. Under the Bill as drafted, an occupational pension scheme may be an investment-regulated pension scheme if one or more of its members can influence the way in which the scheme makes investments.
There are different tests as to the number of members capable of influencing investments, depending on how large the scheme is. Where there are 50 or fewer members, having one member with influence over investment is enough to bring it within the provisions of the schedule and, therefore, for the taxing powers to apply. However, schemes of more than 50 members will not be investment-regulated schemes unless at least 10 per cent. of members are, or have been, capable of influencing investment decisions. The amendment would apply the 10 per cent. of members test to schemes of more than 10 but fewer than 50 members. Therefore, a scheme with as few as 11 members could qualify, so a scheme with 21 members would need at least three members capable of influencing investment decisions instead of just one.
The reason for having a stricter test for occupational pension schemes with 50 or fewer members is to prevent schemes from avoiding charges by packing them with stooge members. It would not be difficult to set up a bespoke pension scheme with 11 members, 10 of whom are stooge members with a pension fund of a nominal £1 each. That would enable an individual to circumvent the ban on using these generous pension reliefs to invest in beach huts and other types of residential property, fine wines, fast cars and the kind of things with which the hon. Member for Tatton is probably far more familiar than I am.
There is no magic about the choice of 50 members to relax the test, but we think it strikes the right balance between preventing those who seek to abuse the rules from doing so and drawing in larger schemes. A member can be active or deferred, or even a pensioner. Most occupational schemes will therefore not be caught by the rule. It will make avoidance by small schemes expensive and impracticable without limiting the activities of large occupational schemes run by professional trustees.
The amendment would create the possibility for schemes to manipulate membership in order to get around the new charges while in reality retaining complete control over what investments the scheme makes. In our judgment, that would mean that the abuse of pension scheme funds would not be effectively stopped. As I said, that could cost many millionsand encourage schemes to indulge in artificial manipulation. I am sure that that is not the road that hon. Members want to go down, including the hon. Members for Eastleigh and for Tatton and certainly all Members from my party. I urge the hon. Member to withdraw his amendments, or we will vote against them.

Mark Hoban: The Economic Secretary made a revealing speech. It is interesting that it sought to clarify and remove discretion. I would have thought that 42 pages were quite sufficient to do so, but there are 28 pages of draft explanatory notes on the internet as well, just in case the 42 pages before us did not provide enough clarity. Perhaps we shall return to some of those notes later.
The Economic Secretary said that most occupational pension schemes would not be picked up by the rules. The reality is that the vast majority of occupational pension schemes include 11 or fewer members, so they will be picked up. They will fall within the scope of paragraph 2 anyway, according to the figures produced by the Government’s actuary department, to which I referred earlier.

Rob Marris: Will the hon. Gentleman give way?

Mark Hoban: I will give way, but I am conscious that there are other matters.

Rob Marris: Is it not the usual question—the majority of scheme members will not be caught by the measures, although because they are smaller, the majority of schemes might be?

Mark Hoban: The hon. Gentleman is right, particularly about the figures of members per scheme. However, we are looking not so much at the number of people covered by schemes as at the number of schemes. There is a risk that schemes, rather than their members, will invest in residential property, fine wines, Picassos and such things. The problem is that proposed new paragraph 2(b) requires at least 10 per cent. A 51-member scheme in which one person controlled the disposition of assets would fall outside the measures. That shows the problem of setting limits, because the limits could be breached relatively easily by artificial means.
The Economic Secretary has done quite a lot during debate on this group of amendments to elaborate the Government’s thinking in that area. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.
Further consideration adjourned.—[Mr. Heppell.]

Adjourned accordingly at twenty-two minutes to Four o’clock till Tuesday 20 June at half-past Ten o’clock.